Economic recovery – green shoots or false spring?


  • Business
  • Saturday, 11 Apr 2009

A RENEWED sense of optimism seems to have emerged amid the prevailing global economic uncertainties after some economic data released over the past two weeks showed some improvements.

For instance, China’s official purchasing managers’ index (PMI) – a measure of the country’s manufacturing activities – rebounded into the expansionary territory last month after being in the contractionary zone for six months since September last year.

China’s PMI, whose reading above 50 indicates an expansion, rose to 52.4 in March from 49.0 in the preceding month.

Then, the World Bank’s report came in to say that it expected the Chinese economy to bottom out by the middle of this year as the country’s massive four trillion yuan (RM2.1 trillion) economic stimulus programme has started to gain traction.

The US-based lender saw an increasing likelihood of China’s economy recovering from this year onwards and continue up to next year, adding that this could potentially contribute to the stabilisation and even recovery of the region’s economies.

But the World Bank also warned that a truly sustainable economic recovery for Asian economies was still dependent on conditions in developed economies as China is still heavily reliant on exports to world markets for growth.

Meanwhile, there were some hopeful news from the United States, with improvements being reported in its manufacturing and housing sectors.

For instance, the Institute for Supply Management’s factory index rose for the third consecutive month to 36.3 in March, pointing the index nearer towards the breakeven point of 50.

The world’s largest economy also reported unexpected increases in the sales of new and existing homes, as well as orders for manufactured and durable goods for February.

On the local front, exports for February fell for a fifth straight month but at a slower pace of 15.9% year-on-year (y-o-y), compared with 27.8% y-o-y in the month before.

But imports for February collapsed further by 27.3% y-o-y, resulting in a still-healthy trade surplus of RM12bil for the month in review.

Although Malaysia’s leading index – which is used to gauge the direction of economic performance in the coming months – is still trending downwards, it has started declining at a moderated pace since January, suggesting that the magnitude of decline in domestic economic activities will narrow slowly in the second quarter of this year, with a possible recovery in the second half of the year.

But can we take improving indicators of just several countries as signs that the economy is bottoming out?

Are they really green shoots of an economic recovery or just a false spring – an extended April Fool’s joke, so to speak?

Economists say it is still early days to conclude that the recent improvements seen in some leading indicators are signs of the economy bottoming out.

They regard those data points as still weak and inconclusive, as some of those improvements could be due to low-base factor.

For instance, the softer contraction in Malaysia’s February 2009 exports was most likely due to a lower base in February 2008, which was the month of Chinese New Year festival.

In addition, considering the magnitude of the collapse of economic activities over the past few months, such small improvements would not have been sufficient to arrest the rise of unemployment and restore consumer demand in the west as well as in Asia.

As it is, consumer and business confidence is still languishing, particularly in the western world.

Maybank Investment Bank Bhd chief economist Suhaimi Ilias believes that the financial crisis is far from over. He points out there are still some ongoing issues in the European region with some “black boxes” waiting to be discovered.

So, further data observations are still required before concluding that the worst is over for our economy.

The consolation for Malaysia, however, is that we may not witness such sharp downturns as we saw early this year and late last year for our trade and industrial production data in the months ahead.

Economists believe the declines in Malaysia’s trade and industrial production will continue to moderate and that we will record smaller magnitude of decline from the second quarter of this year onwards.

According to RAM Holdings Bhd group chief economist Dr Yeah Kim Leng, the stabilisation of export, which is one of the key components of the economy, is vital to help boost confidence in domestic spending in Malaysia.

“With tentative signs of improvements in some of the leading economic indicators, concern over a deep and prolonged recession could slowly abate,” Yeah explains.

Globally, key interest rates have been slashed to all-time lows, while fiscal stimulus packages totalling about US$3 trillion to date, or 5% of the world’s gross domestic product, have been rolled out to arrest further economic contraction and improve consumer and investor confidence.

These stimulus packages are expected to take at least one to two years to have a continuing impact on the world’s economy.

Going forward, does Malaysia still have to depend on exports contribution to lead growth?

Economists say the country cannot help but rely on export markets because the country’s population of less than 30 million people is too small for the economy to depend fully on domestic consumption.

According to Suhaimi, what Malaysia can do is to focus on diversifying and broadening its market reach, even though it may not be easy at this moment given the prevailing global economic climate.

Yeah adds that Malaysia can further enhance intra-Asian trade, and refocus on non-traditional markets such as China and India, both of which are currently viewed as the new engines of growth for the region. Being recognised as a global halal hub, Malaysia also has the advantage in markets like the Middle East.

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