This article first appeared in Forum, The Edge Malaysia Weekly on June 3, 2019 - June 9, 2019

Let’s start with some good news.

Malaysia’s headline gross domestic product (GDP) growth remained in the mid-4% territory in the first quarter of the year — exceeding expectations and considered respectable against the recent series of unfavourable global developments. Statistics show that domestically, the buying strength of consumers continued to support headline growth. Malaysians are still spending, helped by a relatively stable labour market. This could go on for a while, although consumers’ appetite may start to wane in the later part of the year as confidence moderates amid global uncertainties.

As expected, external statistics continued to moderate. The reasons are well known to many. Global demand has weakened and commodity prices have softened somewhat. Although crude oil prices remain relatively strong amid global supply shocks, the S&P GSCI (a composite commodity index commonly used by observers as a benchmark) has declined by about 7% from its recent peak in April. Global semiconductor sales have also slumped in recent months. And do not forget, the price of crude palm oil dropped below its RM2,000 per tonne threshold recently, its lowest in almost six months.

Causing some discomfort to the global psyche are the renewed trade tensions between the world’s two largest economies. With the US and China imposing more tariffs on each other, prospects of a quick turnaround in global trade have dimmed. This has a significant knock-on effect on global sentiment, as exporters slash production in anticipation of weaker demand. Some are even concerned about the possibility of a currency war, especially if countries start to find ways to safeguard their export sectors. There are also worries about the US imposing tariffs on European carmakers in the near future. If this happens, it will compound anxieties over the prospects for global trade.

The concern over China’s overall trade performance is understandable. The country’s trade numbers do not look that pretty at this juncture. Exports fell again in April after a brief rebound in March. Although imports rebounded mildly after three consecutive months of contraction, the overall trend stayed weak.

The performance of regional exports has also remained subdued. For instance, Singapore’s non-oil domestic exports registered double-digit negative growth in March and April. The recent weakness in April’s exports was due to the decline in both electronic and non-electronic shipments. On a year-to-date basis, Singapore’s non-oil domestic exports have contracted in three out of four months.

Statistics are already reflecting the current sombre mood. Data from the Netherlands-based CPB World Trade Monitor (which monitors the trade statistics of 81 countries) shows that the growth of global trade volume sank into negative territory in February this year, after recording a mild rebound in January. Another negative number for March will lead to an overall contraction in trade volume in the first quarter of the year. If that happens, it will be the first contraction since the global financial crisis in 2009.

The semiconductor sector — one of Malaysia’s primary export industries — is also feeling the heat from plunging worldwide sales. According to statistics from the Semiconductor Industry Association, global sales fell at a double-digit pace on a year-on-year basis in February and March. In March, sales fell on a year-on-year basis across all major regional markets and semiconductor product categories. The back-to-back, double-digit drop in sales in February and March was, again, last seen during the global financial crisis. Prior to that, a double-digit contraction over two consecutive months happened during the 2001 recession in the US. The recent decision by the US to suspend business dealings with China’s telecommunications giant, Huawei Technologies, will exert additional pressure on global semiconductor sales.

It is, thus, unsurprising that Malaysia’s trade numbers cooled off in the first quarter of the year. In fact, gross exports in the first three months of the year fell 0.7% while in real terms (adjusted for inflation), exports of goods and services barely grew, according to statistics from Bank Negara Malaysia. Together, these numbers show that achieving the central bank’s export growth target for 2019 would be challenging, if current global trends persist.

Fortunately, global crude oil prices have remained surprisingly resilient on the back of supply constraints. Brent crude oil prices have remained above US$70 per barrel since the first week of April, higher than the upper end of the government’s price assumption of US$60 to US$70 per barrel for 2019 to 2021. And over the medium term, it is possible that supply constraints could continue to support global crude oil prices.

This is because in the aftermath of the 2014 oil market collapse, investment in the oil and gas sector had plunged precipitously. Though it started picking up last year, the sector has not returned to its old spending ways. According to the International Energy Agency, new investments are increasingly flowing into short-cycle projects because of uncertainties about the future direction of the energy sector, among other things. If there is no major increase in spending on developing new reserves, the agency foresees a global oil shortage in the next decade.

Another positive aspect is that Malaysia’s export market is more diversified than it was, say, 20 years ago. The US is no longer our major trading partner. In addition, it is commonly argued that Malaysia will be among the Asean economies that will benefit from the trade war-induced global supply chain realignment. Some studies suggest that together with Thailand and Vietnam, Malaysia will see more trade opportunities and benefit from the information technology equipment and electronics manufacturing sectors.

As a whole, global trade uncertainties will mean that Malaysia has to rely more on the domestic side for support. In the absence of a robust expansion in private investment, consumers will again have to play a crucial role in supporting the economy. Thus, managing consumer confidence is of paramount importance. A stable labour market is also needed to ensure that consumer spending holds up. Against this backdrop, Bank Negara’s recent move to reduce the overnight policy rate is a step in the right direction.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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