This article first appeared in The Edge Malaysia Weekly on February 12, 2018 - February 18, 2018

THE latest set of economic statistics, released last week, shows a significant slowdown (on a yearly basis) in exports and industrial production in December. Using that as a yardstick, this could mean that domestic economic growth in 4Q2017 might not be as robust as earlier last year.

Bank Negara Malaysia is expected to release the 4Q2017 gross domestic product growth rate on Wednesday. Economists opine that weaker-than-expected exports are likely to weigh on domestic growth, but they do not foresee a sharp slowdown.

UOB (M) Bhd senior economist Julia Goh highlights in her report that the trade surplus — which fell 1.1% year on year to RM27.7 billion in 4Q due to higher imports over exports — could potentially weigh on the final quarter’s GDP growth. Still, on a cumulative basis, the trade surplus is up 10.3% y-o-y to RM97.3 billion for 2017, she notes.

Bloomberg consensus sees an average 4Q2017 GDP growth forecast of 5.3% while the full-year estimate is 5.7%, representing the higher end of the official forecast of 5.2% to 5.7%.

To achieve GDP growth of 5.7% for the full year, 4Q GDP growth would have to come in at 5.2%. Growth in 1Q was 5.6%, 5.8% in 2Q and 6.2% in 3Q, largely backed by the exponential growth of exports.

Export outlook remains positive

Export growth decelerated to a 14-month low of barely 4.7% y-o-y in December — substantially below the consensus estimate of 12.7%. In November, export growth totalled 14.5% y-o-y. That said, full-year export growth amounted to 18.9%, the highest in 13 years.

“The sharp decline in export growth was expected, although we thought it would have happened earlier, in November. This decline is because of the higher base effect, and it could have been affected by the exchange rate as well,” says RHB Research chief Asean economist Peck Boon Soon, who has raised his 4Q GDP forecast from 5% to 5.2%-5.3%.

The ringgit strengthened against the US dollar last year. In December alone, the local currency appreciated 1.07% against the greenback to 4.01. By last Friday, it was trading at 3.93.

Most export sectors slowed in December, with the exception of crude petroleum and petroleum products. In fact, the electrical and electronics (E&E) sector, which was the star of exports last year, slowed to single-digit growth of 6.2%. Kenanga Research comments that this could be a signal of the end of the technology upward cycle.

Import growth also slowed in December, rising 7.9% y-o-y, compared with 15.2% a month earlier. Intermediate and consumption imports declined 0.7% and 2.6% respectively. On a full-year basis, import growth stood at 19.9%.

Although exports are expected to moderate further this year, economists believe that the outlook for exports this year remains good, hingeing on steady growth of the global economy.

“While December’s exports moderation points to a tapering of the 2018 growth momentum, the outlook for the commodities and E&E sectors remains positive on the back of synchronised global growth and bullish commodity prices,” says Kenanga Research.

Commodity prices to fuel IPI growth

Growth of the Industrial Production Index (IPI) decelerated to a 19-month low in December — rising only 2.8% y-o-y — which could point to more moderate 4Q GDP growth. The slowdown was due to the high base effect, year-end holidays and moderating export growth, says MIDF Research.

“By component, manufacturing and electricity production was up 5.4% and 3.9% y-o-y respectively, while mining output contracted 4.1% y-o-y despite rising global commodity prices. In annual terms, IPI growth averaged 4.5% last year, an improvement on the 3.8% in 2016,” adds the report.

As external trade performance is expected to remain robust — and the increase in commodity prices is expected to boost industrial activities in Malaysia — the IPI’s growth trend is expected to continue this year.

“Plus, the receding threat of protectionism and expected spill-over effects from the US tax cuts will drive up global trade activities this year,” says MIDF Research.

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