Friday, February 19, 2010

Economists Anticipate Economy Would Strengthen Further

THE last piece of economic data for a tumultuous 2009 was the industrial production index (IPI), which showed a strong bounce in the month of December.

The 8.9% improvement in industrial production in December from a year ago was only the second time industrial production for 2009 was in the black but the magnitude of the bounce and the similar pattern of factories roaring back to life in other countries have more or less affirmed opinion that the worst is behind us.

“Short term forward-looking indicators point to a sustained pickup in gross domestic product (GDP) and manufacturing activities in the first three to six months of 2010, as per the index of leading economic indicators and the global manufacturing Purchasing Managers’ Index, which chalked up its sixth consecutive month of expansion in January,” says Maybank Investment Bank in a note.

Industrial production data has a big influence on economic growth numbers given that the size of the manufacturing sector is still sizeable in Malaysia. Economists also point out that electricity consumption, which together with manufacturing and mining output make up the IPI, also gives some rough indication to the services sector activity in the country.

Manufacturing output, however, carries the heaviest weightage in the IPI. Industrial production was lifted by manufacturing activity, which posted a 12.9% growth in December from a year ago.
The electricity sector saw a growth of 14.1% but mining was down 0.2% as crude oil output fell.

“Real GDP should have rebounded year-on-year in the fourth quarter of 2009 as industrial production expanded 2.9% year-on-year – the first growth since the third quarter of 2008 – lifted by manufacturing and electricity production which gained 5.1% and 10.3% year-on-year respectively,” says Maybank.

“This supports the current view that the Malaysian economy has expanded year-on-year in the fourth quarter of 2009 after consecutive declines in the preceding three quarters and a flat fourth quarter of 2008. Our 2009 real GDP growth estimate of -2.2% versus -3.8% actual real GDP in Jan-Sept 2009 implies that the economy expanded by at least 2.5% year-on-year in the fourth quarter of 2009.”

OSK Research, in its note, says that although the IPI for 2009 was down 7.6% from a year ago, it sees the index rising by 9.4% for this year as the mining, electricity and manufacturing sectors continue to climb in the months ahead.

“Demand in the mining sector would continue to be boosted by higher commodity prices on the back of gradual economic growth. In view of growing domestic and global demand as well as better consumer sentiment, we see production levels in the manufacturing sector scaling up to meet increasing orders,” it says.

“Through higher levels of production from both the mining and manufacturing sectors, we believe the lengthening of operation hours may fuel demand for the electricity sector.

“Even if there is an electricity tariff hike in 2010, we believe the demand for electricity would be relatively unaffected as it is price inelastic as it is essential to the mining and manufacturing sectors.”

The rebound in the IPI and also stronger export numbers have economists predicting steady economic growth for 2010.

Exports have bounced back and in December, the value of goods from Malaysia was the highest in 2009 and growth of exports for the month was the strongest since July 2008.

AmResearch believes that economic growth rebound in the fourth quarter of the year could become much stronger than market consensus.

“Based on initial indicators of industrial sectors, which includes the manufacturing sector, we are now looking at a stronger growth of 2.5% to 3%, compared to a slower 1.5% growth predicted earlier,” it says in a note.

“This will push full-year contraction to a much slower -2.2% in 2009, before accelerating to 3.5% growth in 2010.”

While there is optimism for growth, some economist says greater scrutiny on the numbers are needed.

“We will know how sustainable the recovery trend is when we observe how the major indicators perform after the second quarter of 2010, as weakness in the major economies especially the US may yet weigh down on stronger growth,” says Kenanga Investment Bank in its note.

“The first half of 2010 may see stronger growth due to the base effect as well as further improvement in external demand and partly due to the residual impact from the stimulus package. However, the momentum may taper off in the second half of 2010 as those factors may start to loose its steam.”

It sees, along with ongoing domestic structural reforms, Malaysia’s economy likely perform below its potential. Kenanga expects the economy to grow by between 3% and 4% in 2010.

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