KUALA LUMPUR (June 20): The 0.7% fall in Malaysia’s exports in May 2023 compared with a year ago is much milder than expected. However, downside risks continue to linger in the global economy, pointing to weak export growth momentum for the remaining months of the year.
United Overseas Bank (M) Bhd senior economist Julia Goh said despite the narrower year-to-date contraction in exports, global demand has yet to show signs of rebounding as the pent-up demand in consumer spending continues to “normalise” post pandemic amid elevated living costs.
“Demand from the advanced economies, particularly the US and Europe, slowed due to tighter monetary conditions, while China’s reopening has yet to provide the desired spillover effects to regional peers, including Malaysia,” Goh said.
She said this has led to a downcycle in the semiconductor sector and lower global commodity prices that led to lower price earnings for commodity exports. Semiconductors — one of Malaysia’s main exports — make up nearly 38.5% of the country’s total exports in 2022.
The Ministry of Investment, Trade and Industry on Tuesday (June 20) revealed that Malaysia’s exports for May fell 0.7% to RM119.6 billion, while imports decreased 3.3% year-on-year (y-o-y) to RM104.19 billion.
This led to the country’s trade surplus jumping 21.4% to RM15.4 billion during the month. Malaysia registered RM223.8 billion of total trade in May, which was 2% lower y-o-y.
“The ringgit weakness against the USD is hoped to somewhat cushion exporters from softening commodity price earnings,” the senior economist said.
She added Malaysia’s manufacturing purchasing managers’ index also showed that business conditions for manufacturing firms in the country have moderated to the greatest extent since January, with the index falling to 47.8 points in May from 48.8 points in April.
Output and new orders both slowed at a faster pace than in April, while companies scaled back employment for the first time in five months.
Purchasing activity also softened, which in turn fed through to the most marked reduction in stocks of purchases for 21 months.
“All these suggest that the current soft patch in exports and production will likely last for some months to come. On top of that, our channel checks revealed that empty containers are piling up in the country,” she said.
The shipping rate for a US route is around 30% below pre-pandemic levels, indicating that the regional consumption slump is worsening, she said.
“Hence, we keep our export outlook at -7% for the entire year of 2023 (BNM [Bank Negara Malaysia] estimation: +1.5%, 2022: +25%). It infers a persistent contraction in exports in most months for the remainder of the year,” Goh said.
OCBC Banking Group Ltd senior Asean economist Lavanya Venkateswaran said the moderate contraction in exports was broadly in line with the bank’s expectation.
Lavanya added the better May trade data overstates any underlying improvements as it was impacted by the moving Hari Raya holiday effect.
“In fact, the combined April/May data confirms that an external sector slowdown is underway. The drivers of May exports were broad-based with key products including electrical & electronics (E&E), chemicals, liquefied natural gas (LNG) and optical/scientific equipment picking up.
“However, the April/May average showed that export growth for key products including palm oil, LNG and E&E worsened compared to the first quarter,” the economist said in a report on Tuesday.
Some pockets of resilience on the domestic front
Meanwhile on the import front, the picture was more mixed.
Import growth, classified by end-use, picked up for capital, consumer, and intermediate goods in May versus April.
“However, the combined April/May average showed that intermediate goods imports [were] the weakest link, more than offsetting better growth in capital, and consumer goods imports,” Lavanya said.
She said this suggests that there are some pockets of resilience on the domestic demand front.
“The upcoming six state elections are also likely to support government spending to some extent,” she said.
Even so, Lavanya said an external sector slowdown remains underway, as reflected in OCBC’s forecast for Malaysia’s gross domestic product growth to slow to 4.1% y-o-y in the second to fourth quarters of the year from 5.6% in the first quarter of 2023.
Slowing growth alongside moderating inflation will keep BNM on hold in its monetary policy. However, the central bank will maintain a clear hawkish bias, the OCBC economist said.
MIDF Research is keeping its growth forecasts for exports at -3.4% and imports at -1.9%, taking into account the slowdown in global growth.
“We foresee external demand to also weaken. Increased borrowing costs, for example, could constrain final demand from markets like the US and EU.
“Other downside risks to external trade outlook include deterioration in geopolitical and trade tensions and more significant slowdown in global growth,” the research outfit said on Tuesday.
On another note, MIDF expects recovery in China’s economy will be positive for trade of commodities, while the growth outlook for manufactured goods exports will be influenced by the recent weakness in global manufacturing.
“Imports will be supported by continued expansion in domestic demand; while adjusting to weaker demand outlook thus far caused the reduction in intermediate goods imports.
“To a certain extent, the high base last year will also contribute to negative growth for external, in addition to slower global growth,” the firm said.
Recovery in export growth could commence as early as July — RHB Research
Meanwhile, RHB Research economist Chin Yee Sian painted a brighter near future for Malaysia’s external sector, as he expected export growth recovery could commence as early as July, owing to gradual improvement in the global economy.
“We maintain our view that trade momentum is likely to show an acceleration in 2H2023, with 3Q2023 being the commencement of the recovery process,” said the economist.
He said the weak trade data for April, which are well below historical prints, is an anomaly.
“The gradual recovery of the global economy in summer should be supportive for Malaysia’s trade performance as well,” he added.
The export and import momentum in both nominal and real terms have trended higher for the month of May, with higher outbound shipments seen for most of the product categories (except palm oil and palm oil-based products), with noticeable improvement for E&E, and machineries and equipment shipments.
In terms of destination, higher shipments were recorded for major economies such as the US, Europe and China, he said.