Economics – Malaysia: The Economy Cooled Off Substantially In 3Q08

December 2, 2008 at 4:37 am Leave a comment

National Real GDP Growth

The y-o-y real GDP growth of Malaysia dipped from 6.7% in 2Q08 to 4.7% in 3Q08. It was generally in line with the economic performances of other Asian countries. It does not come as a surprise that the y-o-y real GDP growth of Malaysia dipped from 6.7% in 2Q08 to 4.7% in 3Q08, as the country was beleaguered by both high inflationary pressure and a substantial slowdown in the world economy. We expected the y-o-y real GDP growth for 3Q08 to slow to about 4.5-4.7%. Despite the lower growth, the performance of the Malaysian economy in 3Q08 was better than most nations in the region. In fact, the economies of Japan, Taiwan and Singapore have slipped into recession. Once again, this shows the resilience of the Malaysian economy in facing external shocks.

Real GDP Growth by Economic Activity

The growth of the Malaysian economy in 3Q08 was dragged down by all economic sectors. The growth of the manufacturing sector had slumped, while that of the services sector had slowed. The growth of both the construction sector and the agriculture sector had decelerated significantly. The growth of the mining sector
continued to shrink.
All economic sectors in Malaysia had lost their growth momentum in 3Q08. In particular, the y-o-y real growth of the export-oriented manufacturing sector slumped from 5.6% in 2Q08 to 1.8% in 3Q08, as many major economies in the world had slipped into recession. Given that the conditions of the global economy have recently taken a sharp turn for the worse, we expect the y-o-y real growth of the local industrial sector to contract by 6.4% in 4Q08.
As for the domestic-based services sector, its y-o-y real growth moderately slowed from 8.2% in 2Q08 to 7.1% in 3Q08. Except for the finance and insurance, and government services industries, the growth of the others had fallen in 3Q08.
It is within expectation, as high inflationary pressure crimped private consumption expenditure and many Malaysians turned less optimistic about the economic outlook. We expect that the services sector would continue expanding at about the same pace in 4Q08, as inflation eases off and the local job market remains stable.
Largely due to a sharp fall in the production of palm oil, the y-o-y real growth of the agriculture sector halved from 6.0% in 2Q08 to 3.0% in 3Q08. Considering a continued slowdown in the economies of both China and India, we expect that the y-o-y real growth of the agriculture sector would further dip to 1.5% in 4Q08.
An increase in the costs of building materials and a decline in the civil engineering activities led to a significant deceleration of the y-o-y real growth of the construction sector from 3.9% in 2Q08 to 1.2% in 3Q08. Despite the fact that the prices of building materials have somewhat come off of late, demand for residential properties and commercial buildings has undoubtedly softened. Therefore, we expect the y-o-y real growth of the construction sector to slip further to 0.2% in 4Q08.

Real GDP Growth by Expenditure Component

The growth of consumption expenditure, investment and exports had all slowed substantially in 3Q08. Many Malaysians tightened their purse strings due to elevated prices. Overseas markets shrank significantly and the local export-oriented manufacturers rushed to cut capital spending.
As expected, the expenditure components of the Malaysian GDP had all worsened in 3Q08 in the face of elevated prices in the domestic economy and deteriorating global economic conditions. The y-o-y real growth of private consumption expenditure fell from 9.0% in 2Q08 to 8.1% in 3Q08 (see Figure 4). As the public at large lowers the inflation expectation, we expect the y-o-y real growth of consumer spending to further soften only slightly to 7.8% in 4Q08.
Given that almost half of the global economy was in contraction in 3Q08, it adversely affected the Malaysian exports during the period. The y-o-y real growth of overseas shipments from Malaysia to the world considerably dipped from 9.7% in 2Q08 to 5.1% in 3Q08. As the present economic situation of the world is very much worse than that in 3Q08, we expect the y-o-y real growth of the country’s exports to shrink by 9.1% in 4Q08. Given that the Malaysian exports carry high import contents, it is only natural that the
growth of the country’s imports would fall significantly as well.
As overseas markets for the Malaysian-made products shrink, it is reasonable to expect the local export-oriented manufacturers to reduce their capital spending. The y-o-y real growth of investment in the country significantly declined from 5.6% in 2Q08 to 3.1% in 3Q08. We expect it to sharply fall to -7.6% in 4Q08, as industrial production decelerates substantially of late.

Economic Outlook

The y-o-y real GDP growth of Malaysia for 4Q08 is expected to dip to 1.3-1.5%. We maintain our y-o-y real GDP growth forecast for 2008 and 2009 at 4.8-5.0% and 4.1- 4.3%, respectively.
To be sure, the real GDP growth of Malaysia in 4Q08 will be much worse than that in 3Q08, as the export-oriented manufacturing sector slows at a faster pace and the domestic-based services sector remains subdued. The y-o-y real GDP growth for 4Q08 is expected to sharply dip to 1.3-1.5%. The growth of the local industrial sector in 4Q08 will be badly affected by the contraction of the United States and the Euro Zone economies, as well as a slowdown in China. As for the services sector, its growth is expected to remain sedate as consumers in the country turn more cautious about spending. Therefore, one should not expect an exceptional growth in the services industries such as wholesale and retail trade; finance and insurance; and accommodation and restaurant, which account for a combined total of 25% of the national GDP and 47% of the services sector.
We maintain our real GDP growth forecast for 2008 and 2009 at 4.8-5.0% and 4.1-4.3%, respectively. Our real GDP growth forecast for next year is slightly higher than the 3.5% made by the government and it is admittedly challenging. Our forecast is made based on the assumptions that the United States economy would not slip into a deep recession and the China economy would undergo only a soft-landing. We expect the United States economy to recover gradually in 2H09 and the China economy to grow by at least 8% in 2009.
United States – It takes a turnaround in the housing market to set off a recovery in the economy. However, there is no clear sign of bottoming out in the housing sector as yet. This suggests that the economy would continue to slump. Therefore, it is not surprising that the Americans are generally pessimistic about the economic outlook over the near term.
The present slump in the United States economy has been largely caused by the collapse of the housing market in the country. Therefore, only when the housing market turns around, will one see the economy recovering. The stronger the turnaround is, the faster the recovery takes place.
After improving for the past eight consecutive months, the y-o-y change in existing-home sales deteriorated from 0.6% in September 08 to -1.6% in October 08.
Meanwhile, the y-o-y change in the medium existing-home price worsened from -9.1% to -11.3% during the period. As for the y-o-y change in new-home sales, it deteriorated from -34.1% in September 08 to -40.1% in October 08.
Nevertheless, the y-o-y change in the medium new-home price slightly improved from -7.7% to -7.0% during the period.
Obviously, there is no clear sign of bottoming out in the housing sector in the United States as yet. This suggests that the economy would continue to slump. Therefore, it is not surprising that the Americans are still generally pessimistic about the economic outlook over the near term. This can be evidenced by the Consumer Confidence Index for November 08, which improved moderately to only 44.9, after declining to an all-time low of 38.8 in the previous month.
Based on the latest statistics, the present economic situation of the United States is certainly worse than the recessions in 2001 and 1991. If the housing slump does not bottom out soon, the economic conditions of the country would turn out to be as bad as that seen in the early 1980s. Economic statistics over the next few months are crucial to the economic direction the United States would take for the whole of 2009.

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