Economy Counting On Early Signals Of Trade Recovery, CGSCIMB Says

Exports recorded the steepest decline yet as Malaysia’s export growth decreased for the 6th consecutive month, registering a sharper decline of -18.6% yoy in Aug 23 (Jul 23: -13.0%), while imports contracted by -21.2% (Jul 23: -16.1%).

CGSCIMB in their Economics Note today (Sept 20) cited weakness in exports was largely broad-based, with sharper contractions in commodity-based products such as oil & gas (O&G) and palm oil compounded by the high base effect from the elevated commodity prices last year.

Exports of manufactured goods were also weak

The biggest surprise for the firm came from the E&E shipment, which fell sharply at 15.3% yoy (Jul 23: +7.3%), the steepest drop since the pandemic began in May 20.

In CGSCIMB’s view, this likely reflected China’s recent export control on two key semiconductor materials in trade retaliation against the US.

On imports, intermediate goods appeared to pull the segment down with a double-digit contraction of -22.6% yoy (Jul 23: -20.8%) led by industrial supplies and fuel & lubricant.

However, demand for consumption goods contracted mildly at 5.4% yoy in Aug 23 (Jul 23: +2.8%) although the subcomponent that slipped the most was non-durable goods.

Capital goods rose 5.4% in Aug 23 (Jul 23: – 4.2%) led by ex-transport equipment.

Early signals point towards an economic recovery

CGSCIMB expects export growth to decrease throughout the rest of 2023 given the culmination of weak global demand and base effect from high commodity prices last year.

However, there is potential upside to trade performance in the coming months:

China recently announced a series of measures to prop up its economy. It has reduced banks’ reserve ratio for the second time in 2023, alongside policies to lower mortgage rates, and cut taxes for families.

While this was aimed at improving China’s domestic consumption, its recovery may help Malaysia stem further decline in its export demand.

Palm oil production has started to pick up from its bottom in Apr 23 and is likely to continue recovering on: 1) as foreign labour reaches optimal capacity, and 2) in the absence of the dry weather that affected 2Q23 production.

For O&G, the production decline in 2Q23 could improve in 2H23 following fewer major unscheduled shutdowns.

The recent manufacturing PMI data in major markets such as the US, the EU and China has shown a nascent rebound in Aug 23. While this may imply a one-off occurrence, it could also be an early signal of a turnaround.

That said, PMIs in the US and the EU are still well below the 50-threshold indicating general weakness in activity.

Healthy trade surplus but services account may slow

Despite the disappointing trade number, trade balance appears healthy at RM17.3bn in Aug 23 (Jul 23: RM17.4bn). With two months’ data available for the third quarter, CGSCIMB thinks the ample contribution of the goods surplus to the current account should remain supportive.

That said, the support from the services account remains in question as the increase in foreign tourist arrivals has been rather slow.

As of May 23, foreign arrivals have yet to achieve pre-pandemic levels (currently at 70% of Jan 20 level). Nevertheless, the firm expects current account surplus to decrease in 2H23.

They also estimate the current account to be at 1.6% of GDP in 2023 and 2.2% of GDP in 2024.

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