Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on August 22, 2022 - August 28, 2022

THE external trade data for July was among the first few sets of 2H2022 economic numbers to be unveiled last Friday. Export growth continued its double-digit streak for the 12th consecutive month but came in below economists’ expectations.

In July, exports grew 38% year on year (y-o-y), with a total value of RM134.07 billion. The high double-digit growth was mainly due to the low base effect from last year. In July 2021, total exports amounted to RM97.12 billion. Economists had expected growth to come in at 39%.

Export growth was bolstered by higher demand for electrical and electronics (E&E) products, petroleum products and liquefied natural gas (LNG).

Imports for July grew at an even faster pace, expanding 41.9% to RM118.58 billion while the trade surplus widened 14.3% to RM15.49 billion.

While the external trade data continued its double-digit streak in terms of y-o-y growth, on a month-on-month (m-o-m) basis, the data suggest that external trade may have already hit a peak. Exports had contracted 8.2% m-o-m while imports slipped 4.5%. The trade surplus shrank 29.1%.

Economists caution that export growth is likely to moderate going forward on account of slower global demand, easing commodity prices and a higher base effect.

United Overseas Bank (M) Bhd (UOB) senior economist Julia Goh says there are signs of the global technology cycle entering a softer patch. She pointed out that commodity prices, particularly that of crude palm oil (CPO), have retreated sharply in recent times.

CPO three-month futures contracts currently trade at the RM4,100 per tonne levels compared with above RM7,000 per tonne in April.

On a positive note, the E&E production base rose significantly in June, says Goh. “We think this could signal a sustained structural improvement for the segment given the higher foreign direct investments (FDIs) and new production facilities in the E&E sector, which would further propel the sector’s contribution to the overall output going forward. Based on the two-year production trend, the sector has sustained an uptrend.”

She projects full-year 2022 export growth to come in at 18% after the 26.1% growth in 1H2022.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) Socio-Economic Research Centre (SERC), forecasts that exports will moderate at a pace averaging 15.2% in 2H2022, compared with 26.1% in 1H2022.

There is also a possibility that the double-digit streak seen in export growth data will come to an end soon.

“The high export levels that began in September 2021 would result in low single-digit export growth in 4Q2022. Moderating exports are expected to reduce the trade surplus, hence it will impact real gross domestic product (GDP) growth in 4Q2022,” says Lee.

4Q economic data to be closely watched

Just last week, Bank Negara Malaysia announced the 2Q2022 GDP performance, which exceeded expectations as the economy had grown 8.9% y-o-y. Economists say part of the growth in 2Q can be attributed to the low base effect resulting from the lockdowns last year, but there was also underlying strength seen as the country transitions to the endemic phase of Covid-19, on top of the various fiscal support measures made available by the government.

It appears that the strong GDP numbers are expected to continue in 3Q2022. Maybank Investment Bank Research said in an Aug 12 report that it is expecting mid to high single-digit growth in 3Q, which partly reflects the low base effect from a year ago when GDP contracted 4.5% y-o-y as the country experienced yet another lockdown.

But the real test for the economy will come in the fourth quarter.

What is worth noting is that consumer spending accounts for 58.8% of the Malaysian economy, says SERC’s Lee. “The drivers of robust private consumption growth in 2Q [18.3% y-o-y compared with 5.5% in 1Q] have been due to the release of pent-up consumer demand supported by continued cash handouts, the fourth withdrawal from Employees Provident Fund (EPF) accounts, estimated at RM45 billion, and higher demand during the Hari Raya festive celebrations. In addition, a revival in domestic tourism, although largely supported by local tourists, as foreign tourists are gradually returning.”

All these additional stimulus measures doled out in the light of the pandemic would have already come to an end and there are concerns about whether consumer spending will continue to be robust in 2H2022 and going into 2023. Furthermore, it is not only the end of stimulus measures that can hinder robust consumer spending, but also rising inflation.

It is worth noting that the lower EPF contribution rate of 9% for employees during the pandemic reverted to 11% in July, leaving many with less cash in their wallets and likely to cause some to cut back on spending.

Lee says that despite an increase in nominal wage growth in 2Q2022, the increase in prices has negated its impact. “As a result, many households are dipping into their savings or taking on debt to fund their spending.”

While the pace of growth is expected to soften in the future, UOB’s Goh remains positive on the economic outlook for 2H2022. She says that despite the multiple external headwinds, the banking group remains positive on the economic outlook in 2H2022 in view of the low base effect and the country’s transition to endemicity.

“Notwithstanding signs of potential weakness in some advanced economies and slower Chinese economy, the regional growth outlook, particularly for Asean, remains encouraging, augmented by reopening drivers. Given the strong GDP print of 6.9% in 1H2022, we have upgraded our full-year GDP estimate for 2022 to 6.5%, which implies 6% growth for 2H2022. There is a possibility that the Ministry of Finance may revise upward its 2022 growth estimates during the tabling of the federal budget in October,” says Goh.

UOB’s GDP growth forecast for 2022 is higher than the official estimate of 5.3% to 6.3%.

Maybank IB Research, however, sees slower growth taking place in 2H2022 and 2023 in view of rising inflation and interest rate hikes that will lead to slower global growth, plus the unwinding of domestic stimulus measures put in place during the pandemic. In an Aug 12 report, the research house maintained its GDP forecast for 2022 and 2023 at 6% and 4% respectively.

Goh acknowledges that the outlook for 2023 is expected to be more challenging amid the uncertainties surrounding the global economy. But she does not see a global recession in her base-case scenario even though she recognises the growing recession risks for some economies amid the ongoing Russia-Ukraine crisis, elevated costs, prolonged supply chain disruptions, tighter global financial conditions, ongoing Covid-19 risks with potential new variants, and lingering geopolitical risks.

“Malaysia continues to have adequate domestic growth drivers to sustain the momentum, although more prolonged and elevated external headwinds would affect local consumer and business sentiment that in turn could lead to more moderate demand and investments ahead. While awaiting more certainty in global developments and the announcement of Malaysia’s Budget 2023 on Oct 28, we maintain our 2023 real GDP growth projection of 4.8% for now,” says Goh.

 

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