Despite its respectable first-quarter growth, more challenges lie ahead for Malaysia.
MALAYSIA’S first-quarter Gross Domestic Product (GDP) growth of 4.7% year-on-year (YoY) has somewhat surprised some observers as it beats the private economists consensus forecast of 4.5%.
Although slower than the 5.2% clip registered in the prior quarter, the headline growth can be considered respectable, especially in view of the repercussions from the European?economic crisis that are making their presence felt throughout the globe.
Indeed, jitters about the fate of some of the troubled
economies, namely Greece, Portugal, Spain and Italy, have heightened uncertainties about the economic prospects of the region in totality.
Of utmost concern is the fate of Greece’s membership in the eurozone, which will only be determined after the upcoming election in mid-June. This has roused anxiety in the global financial markets, sparking another round of risk aversion among investors.
As a result, international investors have once again scrambled for safe-haven instruments in the United States, pushing the US dollar up and causing many Asian currencies – the ringgit included – to depreciate against the greenback.
Scrutinising the numbers, some commonly asked questions pop up in one’s mind: what are the salient points about Malaysia’s first-quarter GDP statistics? What are these numbers telling us about prospects for the economy? Are we going to succumb to the global weaknesses yet again? Or can domestic demand buttress our economy in the next 12 months or so?
There are several things to bear in mind when pondering on these issues. First and foremost, Malaysia’s first-quarter growth was not as bad as some quarters had projected. In fact, it beats Singapore and Thailand, which grew by 1.6% and 0.3% year-on-year respectively in the same quarter.
Singapore’s poor performance was largely attributed to its anaemic international trade performance, whilst Thailand’s economy was dragged down by the lag effects of the flood disaster that assailed the country in the middle of last year.
But even China and India, Asia’s high-growth economies upon which the region’s hopes are pinned, experienced sharp declines in their GDP growth numbers. China’s 8.1% expansion, while respectable, was 2.3 percentage points lower than its average 10.4% in the past 11 years.
Similarly, India saw its growth plummeting to 5.3% in the first quarter, the slowest since 2003. Therefore, for Malaysia to register a 4.7% growth rate is considered not bad at all, although it is 50 basis points lower than the prior quarter’s.
Secondly, as widely anticipated, the slowdown from the fourth quarter of 2011 came on the back of the significant underperformance of external trade, as evidenced by the country’s nominal exports which grew at a much slower pace in the first three months of 2012.
Noteworthy are shipments to the European Union, which shrank by 10.4% YoY, followed by China where exports contracted by 3.2% following the European crisis.
Going forward, the external sector will likely take the cue from the economic conditions in Europe, which have obviously also affected other major economies such as China and India.
While the US remains the ultimate destination for the exports of many Asian economies, China’s final demand – especially its commodity consumption – matters considerably for commodity-exporting economies like Australia and Malaysia.
Malaysia’s exports of palm oil to China, for instance, accounted for 22.1% of total palm oil exports. As such, prolonged weakness in China’s economy will clearly take a toll on palm oil prices and impinge on the prospects of one of Malaysia’s primary exports.
However, it is encouraging to see China’s authorities pledging to take more initiatives to support growth this year.
Thirdly – again as expected – domestic demand has played a critical role in bolstering the Malaysian economy in the first quarter. Private consumption, supported by stable labour market conditions, continued to power the economy, having grown by 7.4% – even stronger than the prior quarter’s 7.3%.
Besides the steady labour market, the government’s efforts in dishing out various forms of cash aid to Felda settlers and the rakyat through such means as Bantuan Rakyat 1Malaysia (or ‘BR1M’) have, to some extent, supported private consumption.
What this simply means is that consumer strength, though expected to be slightly dented by the latest Bank Negara lending guidelines, has been extraordinarily resilient in the first three months of 2012.
In fact, consumer confidence has yet to exhibit any signs of deterioration despite the cautious outlook adopted by many businesses. One thing is obvious – loans are still relatively easy to get and that makes it possible for private consumption to continue registering stellar performance for the rest of the year.
The other pleasant surprise came from the investment component, which showed a robust 16.1% expansion from a year earlier.
On the supply side, the construction sector surged by 15.5 % – a pace not seen since 2001. Such an amazing performance was largely attributed to the large infrastructure works and other projects that took place in recent quarters.
Apart from these mega projects, residential investments continued to be robust as the property market is well
supported by strong demand as a result of the favourable age profile of Malaysians.
Going forward, the ongoing mega projects are projected to continue upholding the construction sector, offsetting any softness in private investment which may result from stronger risk aversion.
However, concerns currently being bandied about stem from the ringgit’s prospects, which are likely to mirror those of regional currencies and depreciate against the greenback.
As the European crisis is expected to prolong for at least another six months or so, investors will continue to re-evaluate the prospects of debt-ridden economies such as Spain and Italy.
As such, the US dollar will remain the darling currency of international investors, whilst Asian currencies including the ringgit will face significant downward pressure in the next few quarters.
Indeed, we already see this happening: the Indian rupee ploughed to an all-time low in the final week of May, while the Indonesian rupiah depreciated 4.1% year-to-date.
As for the ringgit, its weakness – if significant – will naturally pose a risk to the economy through capital outflows, as the
amount invested by foreigners in local government bonds (Malaysian Government Securities, or ‘MGS’) hit 39% of total outstanding MGS.
Disorderly outflows, should it happen, would disrupt financial market stability and send the equity and bond markets on another roller-coaster ride. Business and consumer sentiment could consequently be dented due to heightening uncertainty.
A word of caution: despite the respectable performance of the first quarter’s GDP growth, prospects for the rest of the year will hinge largely on the severity of global economic conditions, particularly those of the European region.
Measures to be undertaken by policymakers in major Asian economies will also influence the fate of small, open economies like Malaysia.
At the same time, one simply cannot understate the cruciality of the US economy in bringing back positive sentiments to the global economy. As for the domestic economy, although the strength of the consumer sector will help offset the myriad external headwinds, labour-market stability remains of
For as long as there are no widespread retrenchments, certain segments of consumers will continue to spend, helping provide the necessary fuel for the domestic economic engine.
We must pray for the best.
By Nor Zahidi Alias
16 June 2012