External headwinds remain strong for Malaysia

These will continue to weigh on the export and industrial performance, says DBS, but Malaysia’s economic growth will remain fairly resilient.

DBS Group Research noted:

Trade data (May) is on tap this Wednesday while Bank Negara (Malaysia) policy meeting will convene on Thursday. An improvement in export growth to 6.1% YoY has been penciled into our forecast, from a contraction of 0.1% in the previously month. Imports will likely rise by 8.9%, sustained by still resilient domestic demand, which will thus deliver a trade surplus of MYR 7.7bn.

While it may be tempting to conclude that Malaysia’s exports have bucked the trend of declines in regional export performance amid the global uncertainties or that Malaysia’s exports have rebounded strongly after a slight downside blip in April, it pays to note that the headline number is greatly distorted by base effect. It receives a huge technical lift from the poor set of export number in the same period last year.

On a sequential basis, we had a sharp drop of about 12% MoM sa in March, followed by a slight bounce back of about 1.5% in April. In May, expect a dip of about 0.2% MoM sa, which in our opinion is more reflective of the current external conditions. So if we net out the sequential changes over the last three months (including May), we’re still down about 11%. And that’s telling an entire different story from the headline number.

Moreover, PMIs of key export markets have been heading south again lately while indicators on the global electronics cycle are pointing an easing in the recent inventory restocking process. As far as Malaysia is concerned, improvement on the external front can’t possibly be sustained with the Eurozone stuck in its economic turmoil and the recovery momentum in US increasingly turning more sluggish.

Even Asia’s demand, though still fairly resilient, is gradually showing signs of ebbing.

The message is clear. External headwinds remain strong and will continue to weigh on the export and industrial performance. Yet, economic growth will remain fairly resilient, supported by the domestic engines (mainly consumption and investment) in the economy.