Slower Singapore economy may have domino effect on Malaysia

Singapore’s GDP declined an annualised 3.4% in the 2Q compared to a 3.8% growth rate achieved in the previous quarter


MALAYSIA’S economy remains resilient despite risk it may indirectly be impacted in tandem with the weaker China and Singapore economies as trade issues take a toll on global growth momentum.

Sunway University economics Prof Dr Yeah Kim Leng (picture) said the slowing economy of the republic could have knock-on effects on Malaysia’s external demand, particularly in the upper-middle technologically advanced electrical and electronic (E&E) products.

However, Yeah said Malaysia’s diversified markets and economy — together with strong domestic consumption — would offset any downside risks from Singapore or the overall US-China trade tensions.

“Malaysia’s external demand could slow down in tandem with falling exports from Singapore or China, but it will not be as severe because our economy is diversified and has strong domestic demand, as shown by recent indicators,” Yeah told The Malaysian Reserve (TMR).

Singapore’s GDP declined an annualised 3.4% in the second quarter (2Q) compared to a 3.8% growth rate achieved in the first three months of the year.

The island republic’s manufacturing sector fell an annualised 6% in the quarter, while construction dropped by 7.6% and the services industry decreased by 1.5%.

Market observers pointed to the trade war as part of the root cause, as the heavy-reliant export nation saw a cooling demand of its high-end E&E goods from China and the US.

China’s growth had slowed to its weakest pace since quarterly data began in 1992, despite monthly indicators showing signs of stabilisation.

GDP at the world’s second-largest economy rose 6.2% in the April-June period from a year ago, compared to a 6.4% expansion in the 1Q.

Yeah, who is a member of Bank Negara Malaysia’s (BNM) Monetary Policy Committee, said Malaysia’s economy is well-positioned to weather the headwinds despite strong trade and investment linkages with China and Singapore.

“Malaysia’s diversified exports continue to see positive, albeit relatively weaker, growth. We export E&E products, chemical (products) and primary commodities. We are not as severely affected as other East Asian export-oriented countries such as Singapore, South Korea, Japan and Taiwan,” Yeah said.

Malaysia exports a wide range of goods across the southern border, but three product groups have dominated the trade — integrated microcircuits and associated parts and components, refined petroleum, and electronic consumer products.

Singapore exports a range of goods to Malaysia, and about 60% of the total are refined petroleum and related by-products; integrated electronic microcircuits and components of E&E consumer goods; and chemical products and polymers.

Electronic goods and products are traded between Malaysia and Singapore, or channelled via the two nations as part of regional production networks.

Yeah said Malaysia’s export growth can be sustained at between 2% and 3%, but the figure may need to be revised downwards should no positive outcome result from the trade negotiations between China and the US.

The local economy expanded by 4.5% in the 1Q, well above economists’ forecast of 4.3%, on the back of growth in services and manufacturing.

Affin Hwang Investment Bank Bhd chief economist Alan Tan Chew Leong said the Malaysian economy is expected to keep growing at around the 4.5% level in the 2Q and throughout the fiscal year, despite uncertainties from the trade war.

“The Industrial Production Index (IPI) in April and May stood at 4%. As such, we think GDP growth in the 2Q will still be strong, as reflected in the IPI numbers,” Tan told TMR.

Tan concurred with Yeah that the local economy has the buffer to withstand any downside risks from the trade war as fundamentals are strong on domestic demand and a diversified economy.

He also said Malaysia could be among the winners in the trade diversion seen in the trade war.

Tan argued that Singapore’s GDP development may not necessarily be reflected in Malaysia’s economy.

BNM governor Datuk Nor Shamsiah Mohd Yunus said the baseline projection for growth of between 4.3% and 4.8% this year is supported by private sector demand.

Kenanga Investment Bank Bhd reported that Malaysia’s distributive trade sales value in May expanded by 6.8% year-on-year — a four-month high — to RM110.8 billion on signs of healthy consumption.

It said despite relatively stable figures in May, the performance of industrial production will remain subdued going forward.

This view was premised upon the latest Purchasing Managers’ Index (PMI) reading, which showed a steeper contraction in the manufacturing sector in June.

The PMI slipped from 48.8 in May to 47.8 in June due to declining new orders.

It added elevated uncertainty on whether an actual trade deal could be finalised between the US and China, and whether the ongoing economic moderation in major global markets including China and the European Union would further add risks to foreign demand.

Kenanga forecast GDP growth is likely to extend its slowdown into the 2Q to 4.3% from 4.5% in the 1Q, adding to its whole year projection of a slower growth of 4.5% in 2019 from the 4.7% growth achieved in 2018.