This article first appeared in The Edge Malaysia Weekly on July 9, 2018 - July 15, 2018

EXTERNAL trade data for May, which was released last week, was below market expectations. May export growth dwindled to 3.4% year on year from 14% in April. Imports, on the other hand, grew marginally by 0.1% y-o-y, also a fraction of the 9.2% reported in April.

External trade has been volatile so far this year and economists believe that the volatility in exports and imports will continue in the second half.

“External trade will continue to be volatile for several reasons. The base effect is one and the other factor is the movement of the ringgit. The ringgit was weak against the US dollar for the first half of last year while this year it has been fairly stable, which can cause volatility in external trade,” says an economist at RHB Research.

A report by Maybank Investment Bank Research highlights that monthly external trade figures will continue to be volatile, influenced by the base and calendar effects.

“May 2018’s export and import growth were affected by the high bases in May 2017, when they grew 32.4% y-o-y and 30.2% y-o-y respectively, plus the unscheduled public holidays on May 9 to 11 due to the general election,” it says.

Nevertheless, the biggest concern for economists now is the escalating trade war between China and the US, which could send external trade volatility higher. Developments in the trade war between the two major economic powerhouses could determine how external trade pans out for Malaysia and the world for the rest of the year.

Last Friday, the US began imposing tariffs amounting to US$34 billion on Chinese imports. In two weeks, another US$16 billion worth of Chinese goods could also see the imposition of tariffs. China has responded quickly, saying that it would be forced to retaliate.

United Overseas Bank (M) Bhd economist Julia Goh says in her report that at present, forward-looking indicators suggest choppy to slow export growth for the second half of this year.

“Global Manufacturing Purchasing Manager Indices (PMI) continue to slide while emerging market risks escalate amid mounting trade tensions and higher global interest rates. Malaysia’s latest manufacturing PMI suggests lacklustre manufacturing demand. Imports of intermediate goods, a precursor of future exports, contracted for six straight months,” she says.

Goh has lowered her expectation for full-year export growth to 6.5% from 9% previously.

“We are watchful of potential negative spillovers from the US-China trade tensions. Although there are potential areas that may benefit Malaysia due to the diversion of trade flows, the broader picture remains negative should more countries resort to retaliatory tariffs,” she says in her report.

Meanwhile, BIMB Securities Research says in a report that certain Asian countries could benefit from the trade war between the US and China. It points to statistics from the World Trade Organization (WTO), which have shown world trade volume of goods increasing by 4.7% in 2017, the highest since 2011 and a staggering increase from 1.8% growth in 2016.

“The 2017 increase was driven by rising import demand from Asia, as well as increased investment and consumption expenditure. In fact, according to WTO, Asia had the fastest trade volume growth of any region in 2017 for exports and imports — 6.7% and 9.6%, respectively,” it says.

The research house further points out that trade-related growth between China and the Asean region mainly consists of infrastructure needs while countries like South Korea and India are driven by automotive and electronic goods. It adds that companies in China and South Korea are increasingly taking their investment and technology to other parts of Asia.

“Generally, Asians are buying more from Asian companies. Both demand and supply are coming from Asia ... [it] used to be American and European companies providing the supply. Various countries’ initiatives are also helping to drive growth,” it says.

The research house says there would be a knock-on effect for the rest of Asia from the imposition of tariffs on China as it should result in a fall of Chinese exports to the US. However, it believes that some countries could stand to benefit as China or the US shift their trade.

In contrast, the RHB economist does not think an escalating trade war would play out in favour of Malaysia. “I don’t see any angle that this trade war would benefit Malaysia. Many countries in East Asia and Southeast Asia are highly dependent on exports. Tariffs hurt trade and this will cause ripple effects through the global supply chain. We, like our Asian neighbours, are in that global supply chain. It is definitely a cause for concern.”

For May’s external trade data, export growth, which outpaced imports, resulted in the trade surplus maintaining a healthy balance of RM8.1 billion, according to the economist. However, the amount has declined from RM13.02 billion in April.

It is worth noting that export growth in May was supported by oil and gas exports, with LNG exports rebounding 61% y-o-y on higher volume following three months of decline. Crude petroleum exports also grew for the second consecutive month at 45.8% y-o-y on the back of firmer crude oil prices.

However, manufacturing exports declined in May with electrical and electronic (E&E) exports slowing sharply to 2.1% y-o-y.

“The moderation in Malaysia’s E&E exports tracked that of Singapore, despite continued double-digit growth in global semiconductor sales. We think the export values (in local currency terms) may have been eroded by the ringgit’s appreciation against the US dollar,” says CGS CIMB Research.

Meanwhile, the marginal 0.1% y-o-y growth in imports for May was led by declines in the import of capital and consumption goods.

Nevertheless, Maybank Research believes imports will surge in June to August this year due to the tax holiday, as businesses will take advantage of the zero tax period to make purchases before the Goods and Services Tax is replaced by the Sales and Services Tax on Sept 1.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.