How sustainable is our recovery?

Malaysia has staged a rebound in economic activity, with real gross domestic product (GDP) expanding for three consecutive quarters of 2002 after slipping into a technical recssion since the third quarter of 201. CIMB Securities in its latest economic report notes that engines of growth are being rebalanced with export growth recovering to complement the resilient strength in the domestic demand. Such recolvery trend is also prevailing in some other Asian countries. 

A moderate and sustainable growth going forward 

Going into 2003, Malaysia economic recovery is expected to be sustainable in spite of a slowing US economy. We see real GDP sustaining at 4.3% in 2003 (2002e: 4.0%). 

On the investment front, total gross fixed capital formation (comprising public and private investment) improved to post a smaller increase of 2.6% in third quarter 2002 from -8.5% in the second quarter 2002 following four consecutive quarters of decline. The public sector investment will continue to grow, albeit at a slower rate of 1.2% in 2003 (2002: 0.9%).  

A planned gross development expenditure of RM35bil will be spent in 2003, in addition to RM35.3bil in 2002. The multiplier effect of the government expenditure disbursed in 2002 should also get stronger in 2003.  

Real private investment is expected to pick up gradually, growing by 5.1% in 2003, riding on the continuation of investments in privatised road projects, residential housing development and investment in oil and gas sector. Selected private investment indicators suggest some tentative signs of improvement in investment and there is as yet evidence of a strong pick up in private investment. 


Recent trends and reasons to continue to expect a recovery in 2003 

Despite a cautious external environment, there are no signs of sharp slowdown.  

Current and forward indicators continue to indicate the sustainability of growth momentum. The following fundamental reasons support our assessment. 


(1) Economic leading indicators continue to trend up, albeit at a slower rate 

The index of economic leading indicators, which provides early indications on the direction of growth, has registered fourteen consecutive months of positive growth since July 2001. 

It is an excellent one to two quarter leading indicator of real GDP growth and this suggests that economic expansion would continue to extend into the first quarter of 2003. 

(2) Domestic demand is expected to hold strength and remains a key driver of growth 

Consumer spending, which accounts for 45% of total GDP in 2002 will continue to be the locomotive for domestic demand.  

Disposable income has generally improved since 1999 and there is no strong reason to believe that real income will contract sharply as in 1998. 

Real manufacturing wages had grown by 4.7% per annum during the period 1999-2002, and with employment in the manufacturing sector accounting for 26.7% total employment, the improved income should help to bolster consumption. 

Recent salary surveys by Malaysian Employers Federation showed that private sector employers would continue to provide salary increments, albeit lower at 5.52% for executives and 5.67% for non-executives in 2003. 

As for the public sector employees of about one million (or 10.5% of total employment), the one-off salary adjustments with effect from Nov 1, 2002 under the new remuneration system is an added boost to domestic consumption. 

Total manufacturing investments approved by MITI declined sharply by 50.3% year-on-year to RM10.5bil in the first nine months of 2002.  

It is worth noting that approved foreign investment tended to favour expansion/diversification of projects rather than new ones.  

What matters most is that approved projects will be implemented as planned going forward.  

More importantly, the Government needs to ensure that the existing foreign multinationals would remain committed to investing in Malaysia while at the same time attracting the right type of FDI in terms of technology and capital intensity. 


(3) Exports have bottomed and growth will not slow down dramatically 

Exports had recovered from the bottom to register positive growth for eight straight months since March 2002, lifted by the improvement in electronics earnings as well as higher palm oil prices. Malaysia is a net exporter of oil and gas and for every US$1 increase in crude oil prices, export earnings will rise by RM500mil.  

Exports of electronics (which accounts for 73.7% of total electronics and electrical products as a group and 44.4% of total gross exports) expanded by more than 15% year-on-year since March 2002 as demand for consumer electronics improves. 


(4) Manufacturing and Services the key drivers 

The manufacturing sector will continue to lead the charge, growing by 5.6% in 2003, higher than 4.3% estimated for 2002. 

Within the manufacturing sector, output of export-oriented industries will be sustained by growth in electronics output, benefiting from the continued outsourcing trend by semiconductor producers in US and the EU to contract manufacturers in the Asia Pacific region. 

The services sector, which accounts for 56.4% of total GDP in 2002, will continue to lead the GDP growth going forward. 

The major contributors to services sector growth will be the intermediate services (comprising transport, storage and communications; and finance, insurance, real estate and business services).  

The finance, insurance, real estate and business services subsector will continue to be driven by consumer loans, investment in unit trusts and insurance services. 

Higher commodity incomes as well as continued fiscal spending will uplift the growth of the final services group, comprising utilities, wholesale and retail trade; hotels and restaurants.  

Tourist arrivals are expected to continue to show an improving trend in 2003, despite the recent Bali incident. For the period January to October 2002, tourist arrivals reached 10 million.  

With more tourism-related products and services in the pipeline (such as yachting, eco-tourism, agro-tourism, sports and health tourism), the tourism industry is expected to capture a bigger tourism market. 

The construction sector is expected to grow at a higher rate of 4.5% in 2003 (2002:estimated growth of 2.8%), supported by sufficient government projects (estimated at RM16.8bil) over the next few years as well as housing development projects.  

Total value of loans approved for construction and the purchase of residential property amounted to RM11.1bil and RM27.6bil respectively for the period January-November 2002.  

Likewise, loans disbursed for construction and the purchase of residential property reached RM27.5bil and RM27.7bil respectively during the same period. 

Agricultural output is expected to grow by 2% on the back of improved palm oil production and prices (estimated to average RM1,600 per tonne) as compared to RM1,361 per tonne in 2002.  

Mining value added is forecast to rise by 1.5% due to sustained crude oil production and natural gas production. 


Risks to 2003 macro outlook 

Recent external developments have intensified concerns about the durability and sustainability of the recovery.  

While it is possible that the outlook could be better than projected (e.g. if the US recovery strength surprises on the upside or global demand for electronics turns out to be stronger than expected) one should continue to take note of the following risks, which could have implications on the global economy and Malaysian economy. 

The strength of global recovery continues to depend heavily on the outlook for the United States, which is working its way through its “soft” patch. Risk of economic weakness is still on the cards.  

There is a significant risk of a subdued recovery, especially if the US consumer spending loses steam; if housing markets, which have been providing significant support to demand were to weaken; if corporate investment and spending remain sluggish. 

Elsewhere, Japan is still struggling with its structural problems in the banking and corporate sector while growth in the Euro area is expected to be moderate. 

In emerging markets in Asia, in contrast, the recovery has so far proved stronger than expected in some countries, notably China and Korea. While the final demand growth is becoming broad-based, the recovery remains dependent on external demand.  

The dollar strength. So far, the weakening dollar has been fairly orderly, except for a brief bout of volatility in mid-2002.  

With the US current account deficit remaining very high at US$450bil - US$480bil or 4.6% of GDP in 2002 and expected to widen to 4.7% of GDP in 2003, an abrupt and disruptive adjustment in the US dollar remains a significant risk. 

As for Malaysia’s ringgit peg, the strong build-up in foreign exchange reserves to a 2 ½ year high of US$34.2bil as at 13 Dec 2002 and the weaker dollar trend would strongly underpin the ringgit peg.  

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