According to June survey data, the manufacturing sector faces further challenges in addition to softening demand conditions
by NG MIN SHEN / pic by MUHD AMIN NAHARUL
MALAYSIA’S economic growth for the second quarter of 2019 (2Q19) is not likely to beat the 4.5% expansion registered in 1Q19, as cautious public and private spending and weaker external demand might offset strong manufacturing output and exports.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said 2Q19 economic growth is expected to be hit by continued weakness in government and private sector expenditure, despite the strength of private consumption.
“Tentatively, I’m looking at 4.4% (for 2Q19). The driver for growth would still be private consumption. We have seen retail trade sales grow at an average rate of 7.4% in April and May, versus 8.6% growth in 1Q19, while passenger vehicle sales posted a double-digit growth of 39% in May from the 8.1% growth in April.
“In that sense, consumer spending is still fairly decent, although consumers have to contend with higher living costs. However, government spending and investment among private firms are expected to remain cautious during the April to June period,” he told The Malaysian Reserve (TMR).
The Industrial Production Index (IPI) rose 4% in May this year as a result of gains in all major sectors, beating economist forecasts of 3.5% as growth was driven by increases in all major sectors.
The index, which measures factory output from the manufacturing, electricity generation and mining sectors, also climbed 4% in April.
According to data from the Statistics Department, manufacturing output climbed 4.2% in May from the year prior. Electricity generation increased 5.7%, while mining output increased 3%.
Malaysia’s exports also rose 2.5% year-on-year in May to RM84.1 billion amid higher sales of palm oil and timber-based products, with sales growth coming mostly from exports to India, the US and the Philippines.
However, the IHS Markit Malaysia Manufacturing Purchasing Managers’ Index (PMI) fell to 47.8 in June this year from 48.8 in May, marking a second consecutive month of decline.
According to June survey data, the manufacturing sector faced further challenges in addition to softening demand conditions, while fewer new orders from international customers also weighed on production volumes although companies expect these difficulties to be short-lived.
Affin Hwang Investment Bank Bhd chief economist Alan Tan Chew Leong estimates GDP growth to remain unchanged quarter-on-quarter at 4.5% in 2Q19. He also expects full-year growth to come in at 4.5%.
“The IPI in April and May stood at 4%. As such, we think GDP growth in 2Q19 will still be strong, as reflected in the IPI numbers,” he told TMR.
Meanwhile, Malaysian Institute of Economic Research chairman Tan Sri Dr Kamal Salih (picture) previously told TMR that the country’s economy may not be “out of the woods” just yet, given that the private sector has predicted — based on its business activities — that 2Q19 will be slower than 1Q19.
“Altogether, the GDP for the year may be lower than in 2018. In fact, 2Q19 will be lower than the performance in the first three months,” Kamal said. Malaysia’s GDP growth of 4.5% in 1Q19 was far below the 5.4% increase registered in 1Q18 and lower than the 4.7% expansion recorded in 4Q18. The country’s economic growth stood at 4.4% in 3Q18 and 4.5% in 2Q18.
For the full-year 2018, GDP growth came in at 4.7% on private sector activity amid temporary supply disruptions and a period of uncertainty following the 14th General Election. Bank Negara Malaysia forecast full-year 2019 growth of between 4.3% and 4.8%, which also takes into account the potential impact from US-China trade tensions.
Kenanga Investment Bank Bhd in a report earlier this month said it expects the IPI numbers to remain subdued going forward, despite the relatively stable figures in May.
“This is premised upon the latest PMI reading, which showed steeper contraction of the manufacturing sector in June at 47.8 (May: 48.8), driven by declining new orders,” it cautioned.
“Along with an expectation of softer domestic activity, GDP growth will likely extend its slowdown into 2Q19 to 4.3% from 4.5% in 1Q19, adding to our whole year projection of slower growth of 4.5% (2018: 4.7%),” it added.
On the upside, AmInvestment Bank Bhd chief economist and head of research Dr Anthony Dass in a note on Monday said GDP growth could rise to as high as 5% in 2Q19 following strong manufacturing output numbers, as shown in the May IPI data.
“While the manufacturing sector would continue to experience challenges, namely firms that focus on exports where demand is weakening, the downward pressure could possibly ease.
“Much depends on the possibility of headwinds from the external front softening and if there is support from domestic manufacturing activities,” he said.
Dass said stock adjustment measures have reduced inventories. In turn, lower buying volumes have helped ease pressure on supply chains.
“Manufacturing players are focusing on cost control amid slower production growth, while unfavourable exchange-rate variations are leading to higher raw material prices — thus pushing up the overall operating costs.
“The average PMI reading for 2Q19, which is by far the highest since 3Q18, and supported by an improvement in companies’ future output expectations at the highest in 51⁄2 years, add to signs that the business environment has started to brighten again.
“On that note, we believe manufacturing output should read above 4% in 2Q19 and GDP should grow faster to around 5%,” Dass said.