Saturday September 22, 2012
Resilient second half?
By FINTAN NG
In the wake of the surprising 5.4% year-on-year expansion of the local economy in the second quarter ended June 30, there were many who asked whether the pace of growth will be sustainable for the second half of the year, especially given the global headwinds.
Economists pointed to the drop in factory output, which in turn fed into lower external demand as signs that the outlook for the last two quarters of 2012 will not see as robust a growth as the first two quarters.
Their projections have been reinforced by China's more pronounced slowdown as it restructures its economy amid a drop in external demand. This in turn has impacted its trading partners in the region from Asean to Japan.
Furthermore, investors do not seem to have bought into the European Central Bank's (ECB) commitment to unlimited bond purchases and the annoucement by the US Federal Reserve for a third round of quantitative easing.
Equity markets rallied briefly after the announcements but have since fizzled as confidence in economic fundamentals is sorely lacking since unemployment remains stubbornly high. With recession in Europe and tepid growth in the United States, the fall in developed market demand has taken a toll on Asia's exports-reliant economies.
Oversea-Chinese Banking Corp Ltd economist Gundy Cahyadi tells StarBizweek that global demand for consumer-oriented goods is still far away from seeing a significant recovery, and as long as this remains to be the picture, we expect lackluster growth in the manufacturing sector of export-dependent countries like Malaysia.
He says China will be an interesting factor to monitor closely going forward. “If Chinese growth were to really experience a sharp slowdown, the impact is probably going to be quite material on a global economy that is already shaky,” Gundy says.
He says that while demand out of the eurozone has dropped sharply this year, intra-Asian trade seems to have been more supportive, especially given the infrastructure spending being accelerated across the region.
“If China were to really experience a sharper than expected slowdown, expect intra-Asian trade to be affected quite markedly, weighing on overall growth prospects,” Gundy adds.
However, Forecast Pte Ltd economist Radhika Rao says in an e-mail reply that further deterioration in external demand for key electrical and electronic and resource-based products remain the main source of downside risk for the economy.
Citigroup Inc's London-based European economics head Michael Saunders says in a report dated Sept 19 that the outlook was now balanced between economic fragilities coupled with a new wave of central bank stimulus.
“Both sides of this balance, economic fragilities and policy response, appear likely to be greater than the consensus has been expecting,” he warns.
Saunders says there is widespread evidence of a marked slowdown in growth across Asia, driven by lagged effects of previous domestic tightening plus weaker demand from advanced economies, especially Europe.
With the global volatility, Asian policymakers have focused on domestic demand, trusting that this will help them weather the across-the-board slowdown.
In Malaysia, speculation in recent weeks have been focused on the upcoming Budget 2013, which will be tabled in Parliament next Friday amid talk of an impending general election and the mid-term review of the 10th Malaysia Plan (2011 to 2015), which is next year.
CIMB Investment Bank Bhd economic research head Lee Heng Guie says in a report last week that Prime Minister Datuk Seri Najib Razak would be expected to address issues on the economy and wider social concerns “in sync with economic realities”.
Data from the Statistics Department, which released the country's economic indicators on Wednesday, shows the leading index, which monitors the economic performance in advance, rising 2.3% year-on-year in July, after gaining 2% in June.
Lee says this points to continuing resilience. “As external demand remains sluggish, domestic demand will remain the prime mover of economic growth,” he adds.
However, Lee expects gross domestic product to ease to 4.5% to 5% in the second-half, compared with 5.1% in the first-half, partly due to the year-ago high base and fading domestic consumption-boosting catalysts.
He says external headwinds still warrant caution over the country's export growth while second-half 2011's relatively high base of 5.5% GDP growth will weigh on the year-on-year comparison.
The data also shows that the coincident index, which measures current economic activity, stagnated in July, after growing 1.7% the previous month. The lagging index gained 2.5%.
Lee says optimism for the second-half remains guarded as the coincident index was at its weakest since October 2009, shrinking by 0.6% compared with June while the lagging index, which gained 2.5%, contracted 0.9% month-on-month.
One thing going for most of Asia is that inflation is benign except for India. Malaysian prices have been falling since the beginning of the year on an annual basis while month-on-month, prices have been stable, giving policymakers more room for easing of benchmark interest rates to support growth.
Singapore-based Forecast Pte Ltd economist Radhika Rao says in an e-mail reply that Malaysia is in a sweet spot as growth is holding up well and inflation remains non-threatening.
“After a strong first half, we continue to believe that robust domestic demand driven by expansion of household and business expenditure along with sustained public spending will be the key support factors for rest of the year,” she says.
Rao says even if room for direct fiscal accommodation is limited (given deficit constraints), Bank Negara will still have ample room to stimulate the domestic economy in case such need arises.
She says the economy will moderate going into 2013 but will avert a downturn due to a thriving domestic economy.
Meanwhile, Gundy says that while private consumption will remain high in the second-half and going into 2013, there will be a slight moderation.
However, he is not as hopeful on investments, which was robust in the first half of the year but may not sustain as the bulk of projects has been led by public initiatives.
“Local sentiment is expected to slide, especially if the global economy remains weak, and without a stronger recovery in export earnings, more uncertainties in financial markets, we look for private investment growth tapering into 2013,” Gundy says.
He says the public sector will remain active and does not expect a slump in government spending and initiatives especially regarding the Economic Transformation Programme projects
“As such, while the kind of pace seen in the first-half is unlikely to be repeated, we think there is limited downside risk to growth performance going forward,” Gundy says.