Malaysian Economic Outlook: 4th Quarter 2012 (Update)


The U.S. economy continued to expand in the third quarter, growing 2.5% yoy (2Q2012: 2.1% yoy). The Conference Board’s Leading Economic Index (LEI) for the U.S. meanwhile increased 0.2% in October to 96.0 (2004 = 100), after rising 0.5% in September and declining 0.4% in August. The Conference Board says this suggests that the U.S. economy will expand modestly in the next few months. In November, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) rose to 52.4 from 51.0 in October to indicate a moderate expansion in manufacturing overall. This is the strongest improvement in U.S. manufacturing business conditions in five months. The IMF, in its World Economic Outlook October 2012 Update, projects the U.S. economy to grow 2.2% in 2012 and 2.1% in 2013.In the third quarter, the eurozone economy contracted 0.6% yoy, following a 0.4% yoy contraction in the previous quarter. It has not grown in three straight quarters and the third quarter decline in GDP was the second straight decline. Technically already in a recession, the eurozone is offering little hope for the worsening global environment, with rising unemployment and fiscal austerity undermining the region’s economic fortunes. According to flash estimates, the November Markit Eurozone PMI Composite Output Index was little changed, up fractionally to 45.8 from 45.7 in October. As October’s reading had been the lowest since June 2009, PMI data suggests that, for the fourth quarter of 2012 so far, eurozone’s contraction of output is at its strongest since the second quarter of 2009. The IMF projects the eurozone economy to contract by 0.4% in 2012, and to expand by 0.2% in 2013. These updated forecasts are -0.1 and -0.5 percentage points below its WEO July 2012 Update.Third quarter GDP growth of the Chinese economy moderated again to 7.4%, its seventh consecutive quarter of yoy declines in output. However, there are signs that the Chinese economy may have halted the momentum of its slowing down. Unexpectedly higher retail sales and fixed-asset investment in October, compared to a year earlier, have added to recovery hopes. And in November, the China HSBC Flash Manufacturing PMI hit a 13-month high of 50.4, up from 49.5 in October, crossing for the first time in a year the neutral level of 50.0 to signal an overall improvement in business conditions. The survey’s forward-looking indicators also suggest that output will continue to increase in December. The IMF meanwhile expects the Chinese economy to expand 7.8% in 2012, and by 8.2% in 2013.

The Malaysian economy remains surprisingly resilient. In 3Q2012, its GDP growth moderated to a still commendable 5.2% yoy from a revised 5.6% in the second quarter. The growth was driven by strong domestic demand, with impressive albeit slightly slower yoy growth in private consumption and private and public investment outlays. Net exports had meanwhile contracted further due to the deterioration in external demand for manufactured goods and commodities.

The services sector expanded at a higher pace of 7.0% yoy in the third quarter compared to 6.6% in the previous quarter. The manufacturing sector is obviously feeling increasingly the heat of negative developments overseas as its third quarter pace of growth moderated somewhat significantly to 3.3% yoy compared to the second quarter’s 5.6%. The construction sector, which is benefitting from the on-going implementation of infrastructure projects, expanded a still staggering 18.3% yoy (2Q2012: 22.2% yoy). In terms of percentage point contribution towards real GDP growth, services contributed 3.8, manufacturing contributed 0.8, while construction contributed 0.6. Quarterly economic indicators up to September 2012 indicate that Malaysia’s industrial production could face headwinds in the quarters ahead. On a quarterly basis, the third quarter Industrial Production Index (IPI) rose 2.4% yoy, a sharp pullback from the previous quarter’s 4.9%.

Consumer confidence is still holding up and is expected to continue holding up going forward, as indicated by the results of MIER’s Consumer Sentiments Survey. The Consumer Sentiments Index (CSI) ended the third quarter at 118.3 points, 3.4 points higher qoq. Two of the three components that make up the CSI – Current Financial Position and Expected Financial Position – registered qoq gains of 1.1 and 9.0 points respectively while the other – Expected Availability of Jobs remained unchanged from the previous quarter.

Business conditions in the manufacturing sector, however, have deteriorated somewhat and could deteriorate further, according to the results of the third quarter MIER Business Conditions Survey. The third quarter Business Conditions Index (BCI) fell 15.5 points qoq to 96.0 points, which is below its 100-point neutral level. The Expected Production component of the Business Conditions Index (BCI) fell a significant 18.6 points qoq while the Expected Export Sales component fell 6.2 points. Of the four MIER sectoral indices – Automotive Industry Index (AII), Retail Trade Index (RTI), Tourism Market Index (TMI) and Residential Property Index (RPI) – three came in higher while one came in lower. The AII, RTI and TMI all rose qoq. Only the RPI ended the quarter lower. All four sectoral indices were above their 100-point neutral level.

Inflationary pressures remain benign. The latest Consumer Price Index (CPI) figures showed that Malaysia’s October headline inflation grew 1.3% yoy (September: +1.3%). That’s less than half the year’s high of 2.7%, which was achieved in January 2012. On balance, taking into account the results of MIER surveys, the fact that domestic demand has continued to pick up the slack created by weak external demand, as well as the upward revisions of the 1Q2012 and 2Q2012 GDP growth figures to 5.1% and 5.6% respectively, we are upgrading our full-year 2012 growth forecast to 5.1% from 4.9%. We are also upgrading our 2013 GDP growth forecast to 5.6% from 5.4%. The inflation rate for full-year 2012 is expected to settle at 1.7% while that for 2013 is expected to rise to 2.5%. As for the unemployment rate, it is expected to settle in at around the 3.0% level for both 2012 and 2013.

The Malaysian Institute of Economic Research (MIER)
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