Economic Update - June exports slow, but still better than expected

- Amid the ongoing uncertainties in the global economy, especially in regard to the Eurozone debt crisis and the slowdown in the emerging economies, external demand weaknesses continue to impact Malaysia’s trade as apparent from the data released yesterday.

- After expanding by 6.7% in the previous month, exports growth in June slowed to 5.4%YoY as exports of key products such as crude and palm oil to major economies declined significantly.

- The slow growth, however, was much higher than the 3.1% growth that the market had anticipated (source: Bloomberg poll), and our house estimate of +3.5%.

- While a slowdown in exports was widely expected, the sharp fall in imports in June was a complete surprise, at a growth rate of 3.6%YoY (May:+16.2%YoY). This marked the first time since October 2011 that exports outpaced imports.

- While falling imports could suggest softer levels of domestic expenditure, a more viable possibility is the impact of declining external demand, as the slower numbers were attributed to declining levels of intermediate goods imports.

- E&E export, however, improved as Malaysia’s largest export goods expanded by 2.1%YoY, improving from the previous month’s increase of 1.1%YoY. A similar trend can be seen in the MoM figures, at a growth rate of +6.1% (May: +4.3%MoM).

- In the medium term, external demand will likely remain weak as the global economy faces major challenges in ensuring robust growth in the coming months. This is evident from the significant decline seen in manufacturing activities across the globe in July.

- In this regard, we maintain our view that a real GDP growth of 4.5% would be recorded in 2012, versus 5.1% last year. A slowdown in net exports and other trade-related sectors is inevitable, given the declining numbers on the external front.

- However, notwithstanding heightened uncertainties continuing to cloud prospects in the quarters ahead, we are confident there will be strong levels of expansion in domestic demand in view of the upcoming festive periods and muted inflation, which would encourage consumption.

- Furthermore, in the event of an unexpected severe shortfall from the external sectors, we remain confident that Malaysia will have the capacity to ensure strong levels of growth through both fiscal and monetary measures still available.

Source: AmeSecurities