THE latest Industrial Production Index (IPI) figures reveal moderation or even a probable slowdown in the country's economic growth.
Although overall production grew, driven mainly by manufacturing and mining, exports continued to slow. However, the headline numbers seem encouraging because it was lifted by the low base of the previous year.
“Though these numbers might look good on the surface, these are near-term risks and there are signs that private consumption growth is losing some steam, for example, automobile sales,” says GK Goh Research economist Song Seng Wun.
According to preliminary numbers, Malaysia's December IPI grew by 8.0 per cent year-on-year (y-o-y), up from a revised 5.4 per cent y-o-y rise in the preceding month due to stronger expansion in manufacturing and mining. Growth could have emanated from sustainable pace of export-led sector, supported by domestic activities and driven by private spending.
“Seasonal spending due to the festive seasons and students going back to school are believed to be the main contributory factors,” says Song.
Manufacturing, which accounts for 70.4 per cent of the index, rose by 9.0 per cent y-o-y, versus a revised 5.2 per cent y-o-y in November. But it must be noted that the year ago base was low with December 2001 IPI declining 9.5 per cent y-o-y, the steepest annual contraction in 6 months.
Although there were no details as yet about the source of manufacturing growth, but based on latest December's export growth numbers, GK Goh Research suspects that the expansion in December manufacturing was due to domestic-oriented industries like automobiles.
Exports too, grew at a slower rate despite a low base. The market was looking at 11 per cent export growth for December but the actual 8.6 per cent growth rate was much lower than expected. The strong commodity prices particularly crude oil and palm oil masked the slowdown in the growth momentum of non-commodity based exports.
Therefore, is Malaysia left with the task to fuel domestic liquidity and recover exports through further expansive policies? Are the figures released enough to placate frazzled investors?
On a positive note, Malaysia does have the edge with regards to domestic activities. The IPI was driven mainly by manufacturing, which did not come from export-oriented activities. Although not confirmed, economists believe that the domestic front might be thriving on a hive of activity.
“In that sense, we are ahead of our Asian counterparts,” says another economist from a local research house.
OSK Research reports that regional exports are slowing down. Exports of most other regional countries are clearly reflecting an easing growth trend with the exception of South Korea. Notable declines were Singapore, Thailand and Taiwan.
The pace of export growth in these countries is trending down gradually as softer demand for electronics and electrical products from the US, Japan and Europe slackens.
“At the moment, the Asian market cannot replace the slowing down in terms of demand,” says the economist.
He continues that the overall export outlook hinges critically on the pace of global economic recovery and the global electronics cycle. This is a main component of Malaysia's exports.
Nevertheless, GK Goh Research maintains its forecast for fourth quarter 2002 gross domestic product (GDP) of 5.3 per cent and GDP growth of 4 per cent for 2002. The economist from the foreign research is also maintaining his fourth quarter GDP of 5.4 per cent and 4 per cent for 2002.
The government is clearly planning
for another fiscal stimulus sometime end March.
This, plus the impact of higher commodity prices, is expected to sustain real GDP growth of 5.4 per cent in 2003.
SJ Securities is looking at an additional spending of around RM3.0 billion. The authorities are expected to announce the stimulus measures during the release
of Bank Negara Annual Report.
The economist from the foreign research, however, feels that a fiscal stimulus would not help much, as a RM3 billion-package was still less than one per cent of nominal GDP.
Song says: “Its more of a psychological move, not really a big kick for the economy. It is a good move though, because there is room for government spending to step up.”
SJ Securities reports that what will be of interest for now would be whether the performance of IPI in 2003 would be sustainable. Underpinned by regional uncertainties, concerns are whether IPI would turn out to be less optimistic than envisaged.
What could drag IPI is the slower than expected output growth from the export-led manufacturing sector.
If this happens, it will not augur well for domestic-led sectors, namely those related to consumer items as confidence could erode. Hence, the need to pump prime the economy is perceived to be critical.
Did you find this article insightful?