Malaysian economy in stable phase

MALAYSIA - Despite the stiff headwind from a lacklustre global economic environment, major indicators seem to suggest that Malaysia's economy has entered a stabilised phase.

Growth is expected to have rebounded in the second quarter of the year, as the recently released industrial production data suggest, but we will only know for sure when the country's gross domestic product (GDP) data is released in the coming weeks.

According to data released by the Department of Statistics, Malaysia's industrial production index (IPI) had expanded 3.7 per cent year-on-year (y-o-y) during the three months to June 2013. This compared with an IPI contraction of 0.1 per cent (y-o-y) in the preceding quarter.

As the IPI - which measures output in manufacturing, electricity, and mining - represents close to 40 per cent of Malaysia's total economy, the index is a good proxy of the country's economic growth.

"The rebound in industrial activities in the second quarter points to an improvement in economic activities, on account of a sustained increase in domestic demand, while external demand for the country's exports remained soft amid uncertainties of the global economy," RHB Research Institute Sdn Bhd economist Peck Boon Soon writes in his report.

And given the latest encouraging data, RHB Research says it expects Malaysia's GDP growth for the second quarter to accelerate to 5.1 per cent y-o-y from 4.1 per cent in the first quarter of the year.

CIMB Investment Bank Bhd and Alliance Investment Bank Bhd also expect Malaysia's GDP growth to accelerate in the second quarter, but both brokerages have a lower target rate at 4.7 per cent, compared with that of RHB Research.

Resilient domestic demand

As it stands, the improvement in the country's industrial output during the three months to June was broad-based, led by a surge in electricity output as well as a strong turnaround in the mining sector.

During the quarter in review, electricity output expanded 6.3 per cent y-o-y, suggesting stronger economic activities. This compared with an increase of 4.7 per cent y-o-y in the first quarter.

Mining output, on the other hand, grew 4 per cent y-o-y in the second quarter, after experiencing a contraction of 2.1 per cent y-o-y in the preceding quarter. The turnaround in mining output was driven by increased production in crude oil.

And despite the volatility in manufacturing output on account of sluggish exports, the sector also picked up pace during the second quarter by expanding 3.4 per cent y-o-y, compared with a mere growth of 0.2 per cent y-o-y in the preceding quarter.

CIMB Investment Bank chief economist Lee Heng Guie argues in his note: "Despite the export retrenchment drag, we think that GDP growth weakness has bottomed out in the first quarter of the year."

Lee attributes Malaysia's economic growth to continued expansion in consumer spending and investments, especially those in relation to the public-driven Economic Transformation Programme projects. He notes that the two salary increments - once in January and another round in July - for the country's 1.4 million civil servants that had cost the Government RM3.9bil (S$1.52bil) would also help sustain consumer spending in the latter part of the year.

On another positive note, Alliance Research says it believes the rebound in Malaysia's economic recovery is taking place sooner-than-expected based on the recent economic releases that have shown that the external environment could already be improving.

Its chief economist Manokaran Mottain notes that, for one, the Purchasing Managers Index (PMI) for July have shown signals of stronger recovery in the global economies.

In the United States, the benchmark Institute for Supply Management (ISM) index rose to 55.4 in July from 50.9 in the preceding month. And for the first time in 18 months, the 17-nation eurozone economy saw its PMI exceeding the 50-point threshold that demarcates expansion from contraction.

The Markit's eurozone composite PMI increased to 50.5 last month from 48.7 in June, in a sign that the economically troubled region could be on the cusp of recovery.

Manokaran argues that improvement in key economic data from major economies such as the United States and eurozone, as well as the relatively cheaper exports on account of the weaker ringgit vis-à-vis the US dollar, would benefit Malaysia's exports.

RHB Research, on the other hand, argues that even though the global economy has been showing signs of stabilisation and momentum is building for growth to gather pace in the later part of 2013 through 2014, there are still risks.

These risks include a sharper-than-expected slowdown of China's economy, and those that pertain to the effects of the tapering of US quantitative easing and resurgence of the eurozone debt problems.

Economists concede that Malaysia's external demand will likely show modest improvement despite the risks. But they maintain the view that it will still be domestic demand that will be driving the country's economy over the medium term.

RHB Research, for one, expects domestic demand growth to outpace that of the country's overall GDP growth in the second half of this year.

It says domestic demand growth will be underpinned by the implementation of projects under the various economic programmes of the country, while rising consumerism, high savings and favourable labour market conditions will continue to support consumer spending.