Saturday, 5 August 2017

(The Star) What do June trade figures reveal?

Slower export growth may be due to shorter working month

How much of June’s trade data can be attributed to the high base effect from May and how much can be attributed to slowing momentum in the economy?

Exports rose 10% or RM73.10bil, well below the median of 18.3% in a survey of economists while imports gained 3.7% or RM63.2bil, also well below the median of 19.8%.

Overall, trade was up 7% to RM136.3bil. The trade balance came in at RM9.88bil, higher than the median of RM5.70bil.

While the latest data show that exports will be higher in the second quarter ended June 30 compared to the first quarter, there are indications that the momentum is slowing although the second quarter exports performance could mean economic growth may come in around 5% to 5.2% year-on-year.

The drastic drop in June imports gives a good indication of external demand and also private consumption. Intermediate goods imports used as inputs in manufacturing production and capital goods imports, which refer to machinery and equipment used for production, were lower while consumption goods imports declined as households turned cautious on spending.

Citigroup Inc economist Kit Wei Zheng says in a report that the sequential declines in June exports and imports should be seen in the context of the strong data recorded in May, implying that the June numbers were likely a result of a technical pullback from elevated levels.

He says that while the latest data suggest that momentum in economic activities may be fading, the second quarter trade data show that the tech restocking lift to exports in the previous two quarters appears to have sustained.

Kit also noted that the 0.8% gain in intermediate goods imports in the second quarter versus the first quarter implies that restocking momentum is continuing.

“With second quarter trade surplus up 34.7% year-on-year, net exports could contribute positively to growth in the second quarter,” he adds.

But the latest reading from the Nikkei Malaysia manufacturing purchasing managers’ index is pointing to weak growth ahead after three months of contraction.

Although sentiment improved in July from June, when sentiment fell to the lowest since Nikkei and IHS Markit started compiling the data five years ago, AllianceDBS Research chief economist Manokaran Mottain says this may be seen as a headwind for the manufacturing sector in the coming months.

“It indicates that economic activities in general will be slower,” he tells StarBizweek, adding that the data is indicative of activity three to six months ahead.

Manokaran believes that momentum for the manufacturing sector will not be as good in the second-half compared to the first-half. “This will also tie in with the slower growth in exports,” he says.

In his report following the release of the June trade data, Manokaran says a shorter working month amid festive holidays and plant shut-down for maintenance repairs could have caused the slower growth of exports.

He says this is not a cause for concern as the electrical and electronics (E&E) and oil and gas subsectors remain expansionary with double-digit year-on-year growth for the eighth consecutive month.

Manokaran noted that demand from key trading markets continued to pick up since the second-half of last year with year-to-date E&E exports growth to the United States and China registering 6.8% and 29.8% year-on-year respectively.

“Therefore, we expect the E&E subsector to remain the main driver of exports growth,” he says.

The PMI data will give an indication to where the June numbers for the industrial production index (IPI) that measures factory output, schduled to be released on Aug 10, is heading.

Affin Hwang Investment Bank Bhd chief economist Alan Tan says in an Aug 2 report that seasonal factors will weigh on the June IPI data.

He says the closures of factories for several days in the month may lead to slower output in both manufacturing and electricity production.

Tan expects Malaysia’s PMI to recover in August on the back of healthy new orders and international trade, pointing out that seasonal factors also affected Singapore’s and Indonesia’s PMI data.

His optimism is backed by global manufacturing PMI having rose to 52.7 in July from 52.6 in June and the seasonally adjusted Caixin China PMI rising to 51.1 in July, against 50.4 in June.