KUALA LUMPUR: Most economists now expect the country’s economy to show a contraction, or at best flat growth, in the first half of the year following the sharper-than-expected decline in exports for January.

This follows the precipituous decline in the real gross domestic product (GDP) growth rate to a mere 0.1% in the last quarter of 2008.

Economists were taken aback by the latest trade data released by the Statistics Department last Friday, which showed a 27.8% year-on-year plunge in exports in January.

While a slide in exports was largely expected, they said the rate of the decline, reportedly the worst in 28 years, pointed to tougher times ahead for the economy.

A Bloomberg news survey of 16 economists showed they had expected January exports to decline by 22.4%.

Commenting on the latest trade performance, Malaysian Institute of Economic Research (Mier) executive director Datuk Mohamed Ariff said the possibility of Malaysia experiencing its first quarterly GDP contraction in eight years had increased tremendously.

“Judging from the latest trade data, the external environment continues to weigh heavily on the country’s economy, and the possibility of negative GDP growth in the first two quarters of this year is almost a certainty,” he said.

The trade figures at the beginning of the year showed a surplus of RM8.8 billion, the 13th consecutive month of positive trade balance, largely due to the much larger fall in imports, which shrunk 32% to RM29.5 billion compared with exports which totalled RM38.3 billion.   

The sharp contraction in exports in January was primarily due to a steep decline in the shipment of electronic and electrical items, which fell by 33% versus a 25.6% decline in the preceding month.

This was in line with global chip sales, which slumped by 28.6% in the same month, the fourth decline since October last year.

Month-on-month, exports fell 16.9% from December 2008, while imports were lower by 14.7%.

Malaysian Rating Corporation Bhd’s (MARC) chief economist Nor Zahidi Alias said the prospects for E&E demand remained bleak at this juncture with most players projecting weak sales for the current year.

“Going forward, we think that the outlook for the export sector remains murky until a meaningful recovery in the global economy takes place.

“Contraction in intermediate imports in the past four months suggests that production in the manufacturing sector would not be recovering any time soon, resulting in higher spare capacity in the medium term. 

“Looking at the speed of its deterioration, we foresee an increasing possibility of Malaysia registering a double-digit contraction in real exports this year, said Zahidi. 

Rating Agency of Malaysia Holdings Bhd (RAM) chief economist Yeah Kim Leng said the slide in exports was within the top range of the agency’s projection of a 20%-30% fall, and was in line with other major exporting countries in the region.

Yeah said the agency expected the economy to contract or be flat in the first two quarters of this year but a full-year GDP growth of 1% was still possible.

As for commodities, Zahidi said the value of palm oil exports slipped by 22% year-on-year on low CPO prices as well as weak demand from China and India, while exports of wood products saw a sharp decline of 26.5% from 1.5% expansion in December as housing starts in Japan continued to remain in the doldrums.

Singapore, Japan, the United States, China and South Korea took a combined 51.7% of Malaysia’s total exports.

According to Ariff, of Malaysia’s top five export markets, only China has managed to escape recession so far, but he did not foresee any recovery in exports as the US and Europe still take up the majority of China’s manufactured goods.

He believed that there was a 50% chance that Malaysia’s full-year GDP growth could be negative, while the best-case scenario was a 0.5% growth for 2009. Mier would be releasing its official first-quarter GDP numbers by the middle of next month.

This article appeared in The Edge Financial Daily, March 10, 2009.