Executive Summary

The third quarter Malaysian real GDP annual growth moderated to 5.6% as compared to 6.5% in the previous quarter. Domestic demand continued to be the engine of growth with a 4.6 percentage points contribution to the 5.6% growth. Export demand contributed marginally at 0.8 percentage point to the third quarter growth, despite a stronger second quarter performance. By expenditure components, a hefty 93.7% of real GDP consisted of domestic demand, up by one percent from the previous quarter. The share of private consumption increased to 54.7% (2Q2014: 51.6%) despite tighter liquidity environment as indicated by a slower growth in the narrow money supply (M1). The share of private investment slipped to a below 20% threshold confidence level at 18.0% in the third quarter of 2014.

On the supply side, the services sector was the main contributor to the third quarter real GDP growth, with a percentage point contribution of 3.4%. The manufacturing and construction sectors percentage point contribution were 1.3 and 0.4, respectively. The agriculture sector contributed 0.3 percentage point towards the third quarter growth, while the mining sector had a small positive percentage point contribution of 0.1 percentage point, partly due to declining commodity prices. The services sector's share of GDP continues to increase with a share of 55.4% (2Q2014: 54.7%) and the manufacturing share was at 24.6%.

On the international front, the lackluster performance of developed economies continues to put a pressure on growth prospect of the emerging market economies, including Malaysia. Only the US and the UK are seemed to be on the right track, albeit at a slower pace. Japan is officially in technical recession as its recently released third quarter GDP figure contracted (by 1.6%) for the second quarter in a row, despite the widely anticipated growth of 2.0% due to PM Abe's strong economic recovery plan. The euro area is still struggling with the economic problems of low growth, low inflation, high unemployment and high public debt. Weak investment and exports amid geopolitical uncertainty worsened the growth prospects in the euro area. As such, the IMF has revised downward the euro area growth to 0.8% in 2014 and 1.3% in 2015. Likewise, the world economic growth has been revised downward to 3.3% and 3.8% for 2014 and 2015, respectively.

Slower-than-expected growth in emerging market economies worsened the outlook of the advanced economies as their export demand slows down. For example, China is showing a sign of slowing down in its growth trajectory. The China's November 2014 Markit's Purchasing Managers' Index (PMI) survey pointed to a pessimistic economic outlook with the manufacturing output sub-index contracting. Similarly, Markit's November PMI survey results for euro area and the US were discouraging.

With the glooming world economic growth prospects, the G20 world leaders in the Brisbane G20 Summit have pledged to lift their combined economic growth by an additional 2.1% above the current trajectory by 2018, compared with 2013. This measure is expected to add more than USD2 trillion and create millions of jobs to the global economy. Much of the growth is expected to come from infrastructure investment and getting an extra 100 million women into the labour force.

Notwithstanding a gloomy global economic prospect, domestic producers have not shown a significant sign of slowing down for the near future. The September 2014 industrial production index (IPI) recorded a positive y-o-y growth of 5.4%, contributed by positive growth in all the three sectors, namely manufacturing (4.7%), mining (7.1%) and electricity (6.2%). The growth in the manufacturing production was mainly attributed to electrical and electronic products subsector with the growth rate of 9.7%, compared to September 2013. Strong production performance of the electrical and electronic products sector is a renewed hope for a buoyant export demand, especially from the US. Improvement seen in imports of intermediate goods, with a y-o-y growth of 11.2% in September 2014, is another indicator for the near future upbeat export demand. Meanwhile, the overall capacity utilization rate in the manufacturing sector has been sustained at 78% in the third quarter of 2014 (2Q2014: 78%, 4Q2013: 80%), with export-oriented industries operated slightly higher at 79%.

Investment approvals by MIDA for the first seven month of 2014 were more than the investment value for the entire 2013. As at July 2014, the number of approved projects was 498, lower than the last year's number of 787 approvals for the same period. Likewise, total potential employment created is also lower (52,621 vs 92,988). It follows that, investments are becoming more capital intensive. This is a good sign for a better technology transfer and at the same time addressing the issue of labour shortage and a heavy dependence on foreign workers. Nevertheless, this investment trend exerts more pressure on the labour market in matching labour demand and supply. More skills are demanded, either through formal trainings or reskilling. The labour force participation rate (LFPR) has been on a declining trend with the latest statistics stood at 67.9%, due to increasing cases of voluntary departures from the labour market. Voluntary departures, in turn, maybe attributed to the increasing numbers of younger people going for higher education and older people voluntarily quit the labour market due to skill mismatch. Generally, workers have been discouraged and opted to stay out of the labour market, especially with shrinking number of vacancies reported in recent years. Moreover, senior workforce continues to face de-skilling effects, arising from advances in technology and rising costs of production. All these indicators have pointed out to the final outcome of a convincingly lower unemployment rate, which stood at 2.7% in September 2014.

Strong export demand in the first half of 2014 failed to gain momentum as the recovery of the trading partners from the advanced economies, particularly the US, is slowing down. The latest trade figures in September 2014 indicate that Malaysia was still in the surplus territory with a y-o-y total trade growth of 7.4%. Nevertheless, a positive trade balance in September 2014 was a combination of an improvement on exports coupled with a marked reduction in imports. A favourable export performance was mainly due to an improved demand for electrical and electronic (E&E) products and palm oil and palm oil-based products, which accounted for 35.6% and 9.7% of total exports, respectively. The upbeat performance of the palm oil-based products was attributable to palm oil commodity as its volume increased by 15.8% y-o-y despite a drop in average unit value by 5.7%. United States was the largest buyer of E&E products, while India was the largest buyer of palm oil for this year with the volume of 2.3 million tonnes, overtaken China as the largest buyer for the same period last year. A positive y-o-y growth of 11.2% on imports of intermediate goods is a leading indicator for better future exports. Meanwhile, a slowdown in imports of consumption goods is consistent with tight liquidity situation in the economy. People are cautious on spending, following upward pressure in prices.

The values of ringgit Malaysia (RM) against a basket of major trading partners (China, Singapore, Japan, USA and Thailand) are consistently below the baseline index in May 2013. During the middle of 2013, ringgit depreciated significantly due to large activities of quantitative easing from the US Fed to increase its money supply in the environment of lower interest rates in an effort to boost economic recovery. Ringgit went through a volatile period from the middle of last year until the first quarter of this year before rebounding towards an appreciating trend until September 2014 and got weaken again thereafter. Bank Negara's international reserves were depleted in the bid to support depreciating ringgit.

The third quarter balance of payment (BOP) overall account registered a surplus of RM6.7 billion, an improvement over the previous quarter, despite a smaller surplus in the current account balance. The improvement was mainly due to large short-term inflows to take advantage of tight liquidity measures taken by Bank Negara amid inflationary expectation. Meanwhile, the current account of the BOP registered a smaller surplus due to a combination of smaller surplus in goods account and larger deficit in services account as well as larger income repatriations.

The CPI inflation rate accelerated above 3.0% in the first eight months of 2014 as inflationary pressures continue to build up and there are expectations of further increases in consumer prices induced by the upcoming implementation of GST in April 2015, subsidy rationalization measures, upward wage pressure as a result of the minimum wage policy and other Government fiscal prudent measures. Nevertheless, the September and October 2014 headline inflation rates eased a bit to register 2.6% and 2.8% respectively as Bank Negara tightened domestic liquidity. The annual growth rates of both narrow money (M1) and broad money (M3) continue to decelerate from 13.0% and 8.1%, respectively in December 2013 to 6.7% and 5.2%, respectively in September 2014. In October 2014, M1 was further tightened to 6.0% however, M3 was eased a little bit to 5.4%. This is a strong indication that people are cautious on spending and ease on savings on the fear of inflation expectations as M1 indicates money function as a medium of exchange, whereas M3 is used as a store of value. This will dampen the domestic demand as the driver for growth as people are saving and having less spending, then that would tend to indicate that the economy is heading towards a slowdown.

Malaysian real GDP is estimated to grow at 5.9% in 2014 strongly driven by the private sector, both consumption and investment. Net exports are somewhat strong but on weaker imports. Weaker imports, particularly on the intermediate goods, in turn will jeopardize future exports. As such, the contribution of export demand to the forecasted real GDP growth of between 5.0 - 5.5% in 2015 is predicted to be weaker. Therefore, domestic demand is forecasted to be stronger in 2015 as public consumption and investment are expected to pick up the slack of the somewhat weaker private counterparts. The same trend, but a bit stronger, is expected to persist in the following year. Hence, the 2016's GDP is projected to grow at 5.5 - 6.0%.

Posted by suzy at 08:38 AM on December 05, 2014


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