This article first appeared in The Edge Malaysia Weekly on September 10, 2018 - September 16, 2018

EXPORT growth in July came as a surprise to everyone, beating consensus estimate of 4.7% to register 9.4% year on year. This came on the back of higher electrical and electronic (E&E) exports and a slower drop in commodity exports.

However, most economists believe the export surge is not sustainable moving into the second half of the year.

“The July numbers were distorted by the Hari Raya festivity in June. Due to the festive period, some of the shipments were pushed to July. So, you can expect to see a slowdown in August,” says Alan Tan, chief economist at Affin Hwang Investment Bank Bhd.

Nevertheless, Tan expects exports in August to be supported by manufactured goods, given the growth in semiconductor sales, the region’s Purchasing Managers’ Index (PMI) readings and data from China. Despite the global trade war, economic growth looks relatively healthy, he opines.

Tan estimates Malaysia’s export growth for the rest of the year at 5% to 6%, which is “pretty good”.

Maybank Investment Bank Research says in a report that the surge in E&E shipments could likely reflect a “front-loading” effect in the supply chain as the US’ second list of import tariffs of 25% that came into effect on Aug 23 includes electronic integrated circuits.

The research house has forecast export growth of 6.3% for the full year and import growth of 3.5%, implying a moderation as the front-loading effect dissipates.

Last year, export growth was an exponential 18.9% while imports grew 19.9%.

RHB Research Institute economist Peck Boon Soon also expects a moderation in 2H2018 on account of global growth trending lower, exacerbated by the US trade war. However, he believes the impact on Malaysia will be marginal.

The Maybank IB Research report shows that the global manufacturing PMI fell to a 21-month low of 52.5 points in August, suggesting that a slowdown could be up ahead.

“The breakdown of the August global manufacturing PMI also showed that despite an indication of higher output growth last month, the overall index was weighed down by slower demand for new orders, which was at a two-year low, while employment growth also tapered off. The survey further noted that respondents were more cautious about the year ahead as the future order sub-index dropped to its lowest in two years,” the report says.

Interestingly, MIDF Research economist Kamaruddin Mohd Nor takes a contrarian view, expecting export performance in 2H2018 to be better than the 7% growth in 1H2018.

The research house points out in its report that exports in Vietnam and South Korea, for example, expanded 5.5% and 8.7% respectively in August. “There could be a similar wave in Malaysia’s trade numbers for August. Based on manufacturing conditions and activity, the manufacturing PMI of global and emerging economies maintained an expansionary trend at 52.5 points and 50.8 points respectively in August.

“We predict global trade activities in 3Q2018 to remain upbeat, albeit at a moderating pace, in tandem with easing global manufacturing PMI,” MIDF Research explains, forecasting export growth of 9.3% for the year.

Typically, PMI readings above 50 points indicate an expansion in the sector.

Trade war uncertainties

Economists have been cognisant of the tit-for-tat trade tariffs between the US and China as a brewing war for some time now. Since July, there have been two rounds of 25% tariffs imposed by both sides. The first in July was on US$34 billion worth of imports and the second in August was on US$16 billion’s worth.

On Sept 5, the US Trade Representative Office concluded its public comment period for additional tariffs on US$200 billion worth of Chinese goods. At the time of writing, no announcement had been made regarding further tariff imposition.

Economists are divided on how far the two economic giants will take the trade war. Peck says the additional tariffs on the Chinese goods could go through, although he doubts they will be imposed immediately on the entire amount.

Tan sees the trade war stabilising as Chinese Premier Li Keqiang and US President Donald Trump will be meeting in November. “We are expecting them to come to a compromise on matters regarding the trade war,” he says.

United Overseas Bank (M) Bhd economist Julia Goh says in her report that her preliminary estimates show that should the US$200 billion tariffs take effect, that could affect US$21 billion worth of Malaysian exports — equivalent to 6% to 7% of the country’s gross domestic product (GDP) — directly and indirectly.

“Exports of electrical machinery and equipment, mineral fuels and oils, rubber, plastics, and chemical products are among the key items that will be affected,” she says.

Her report also highlights a bright spot for Malaysia — the reorientation of supply chains, which may bring more trade flow to the country and other parts of the region.

“The International Trade and Industry Ministry of Malaysia said the ongoing US-China trade war has spurred increasing interest among foreign investors, those of China and Japan, to move their regional operations to Malaysia,” she adds.

Emerging market currencies have also been in turmoil over the last few weeks. After the Turkish lira plunged, followed by the Argentine peso, the currencies of countries like Brazil, Indonesia and the Philippines also came under selling pressure.

Many believe fears of a long trade war will destabilise EM currencies, thus worsening the situation.

The ringgit too has suffered somewhat, depreciating from 4.12 against the US dollar on Sept 3 to 4.14 last Friday. While some wonder if exports can be boosted by a weak ringgit as seen in 2015, Peck does not think so as other currencies in the region are also weakening.

Nevertheless, he believes the situation will be contained and not spread to Asean, although some selling pressure on the region’s currencies is inevitable.

Looking ahead

While the course of the Malaysian economy for this year is more or less set (with Bank Negara Malaysia forecasting GDP growth of 5%), how it will grow next year remains a question mark.

With uncertainties in external trade, the deferment of major infrastructure projects in the country and the absence of a feel-good factor from the tax holiday for private consumption, what can spur the economy forward?

Tan forecasts 2019 GDP growth at 5%, similar to his full-year estimate for this year. “Budget 2019, which will be unveiled in November, is expected to focus on driving domestic demand. Despite revenue constraints, the government will look at ways to spur consumption, especially for the low to middle-income group. So it will still be supportive of growth,” he says.

Peck, who also has a preliminary forecast of 5% GDP growth for 2019, says there is a potential downside risk to the projection. “We are interested in how the government will aim to achieve its budget deficit level and also to what extent government revenue will be affected, especially with the loss of GST revenue,” he says.

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