Monday, February 08, 2010

Robust Recovery, If US, China Rebound

MALAYSIA’S highly open economy, where total exports and imports account for more than 200% of gross domestic product (GDP), is expected to record a more robust recovery if growth in the world’s two largest economies continue to outperform.

The US economy recently announced a better-than-expected 5.7% growth in the fourth quarter of 2009 (2.2% in third quarter) as businesses reduced inventories less aggressively.

It was the quickest pace of growth in more than six years, beating market consensus of between 4.5% to 5%. For the full year, the US real GDP contracted by 2.4% in 2009, the first annual recession since 1991.

Meanwhile, China’s GDP is said to have grown 8.7% year-on-year in 2009 – the highest rate in the world. The country registered a 10.7% growth in the fourth quarter of 2009.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng says the US and Chinese markets account for more than a quarter of Malaysia’s exports, excluding intermediate exports to other countries that ultimately ends up in these two destinations.

“The fourth quarter growth in these two economies would also mean a greater absorption of a broader spectrum of Malaysian exports ranging from electronics as well as electrical products to resource-based exports such as rubber, petroleum, wood, chemical and palm oil products,” he notes.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias concurs that the country’s economic rebound would ride on the growth experienced by its major export markets like the US and China.

“Malaysia’s GDP growth is highly correlated with the US’ since the 1997 Asian Financial Crisis,” he says.

China’s strong rebound will also benefit Malaysia as its share of total exports have been steadily rising from 2% in 1999 to about 9% in 2008, he notes.

However, Zahidi adds that Malaysia’s economic rebound is also tied to the stimulus measures implemented by the Government.

“Consumer spending has strengthened, expanding by 1.5% in third quarter of 2009 after contracting by 0.7% in the first quarter, following an improvement in the Malaysian labour market,” Zahidi says.

However, the question remains if the recovery in the major global economies is likely to be sustained and how this would impact the Malaysian economy.

Although the US economy rebounded strongly in the fourth quarter, much of the growth was said to be driven by a rebound in inventory.

According to Zahidi, changes in inventory resulted in more than half of the growth (3.4% out of 5.7%). “Inventory correction, unfortunately, cannot sustain the US economy’s growth in the medium term,” he says, adding that real demand is needed.

However, private consumption remained lackluster in the fourth quarter, due to the high jobless rate and cautious lending by banks.

While the US official unemployment rate stood at 10% in December last year, the rate which includes discouraged and temporary workers stood at 17.3% in the same month.

At the same time, US banks were still very cautious in their lending to consumers, as seen by the 3.9% contraction in consumer credit in November last year.

Malaysia’s economic growth, Zahidi says, will largely depend on global conditions, adding that a sustained expansion in global growth and international trade will have a positive impact on the economy.

“If the global economy does not succumb to a double dip, then the prospects of achieving the Government’s targeted growth is bright,” he says, adding that domestic demand would also strengthen should consumer spending sustain throughout the year.

However, Zahidi says there are risk factors that could moderate the country’s growth.

“Malaysia’s household debt-to-GDP ratio stood at more than 60% in the past few years. A continued increase in credit-card transactions may lead us to question whether consumers are becoming more dependent on credit in supporting their consumption habit,” he points out.

Besides that, a correction in equity prices may also dampen consumer and business sentiments as well.

A recent report by the Malaysian Institute of Economic Research (Mier) says that although there are signs the global downturn has stabilised somewhat, overall recovery is expected to be sluggish and uneven.

“The recovery from the current crisis will be difficult compared to the previous ones because of the synchronised nature of the downturn.

“The technical recession is likely to end in the fourth quarter of 2009. However, Malaysia may not regain strength until the global economy is back on track, which is going to be at a disappointingly slow pace,” Mier says, adding that the services sector would be a pillar of strength amidst a glum manufacturing sector.

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