PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

10 August 2010

Industrial Production Slowed Down In June, GDP

Growth Estimated To Have Softened To +8.1% In
The 2Q

◆ Industrial production slowed down to 9.4% yoy in June, from +12.3% in May and a high of +14.2% in March.
This was the slowest pace of growth in four months, suggesting that industrial activities are moderating. The
slowdown was due to a more moderate increase in manufacturing production, in tandem with a slowdown in the
exports of manufactured goods. A slowdown in electricity output worsened the situation. These were, however,
mitigated by a pick-up in mining output during the month.

◆ Cumulatively, industrial production moderated to 10.8% yoy in the 2Q, from +11.0% in the 1Q. Slower
growth was due to a slowdown in electricity and mining output in the 2Q. These were, however, mitigated by a
slight pick-up in manufacturing production during the quarter, underpinned by the resilient domestic demand during
the quarter. Based on the preliminary numbers, we estimate that real GDP growth is likely to have moderated
to 8.1% yoy in the 2Q, from the peak of +10.1% in the 1Q. This was due to a slowdown in exports, which was
mitigated by a pick-up in domestic demand

◆ Going forward, the global economy is likely to slow down in 2H 2010, as worldwide stimulus spending
dissipates and austerity measures in some European countries to address fiscal deficit and debt problems begin to
bite. This will likely be compounded by the policy normalisation and tightening measures introduced in some
countries, particularly in Asia, that will likely slow down economic activities in these countries. As a whole, we expect
the country’s exports to slow down in 2H 2010, after a strong pick-up in the 1H.

◆ We envisage domestic demand to ease as well to 3.8% yoy in 2H 2010, from +6.1% in the 1H. This will
likely be reflected in a more moderate increase in consumer spending, while business spending will likely slow down
as well. As a whole, we expect real GDP growth to slow down to 4.5% yoy in 2H 2010, from +9.1% in
the 1H. For the full-year, real GDP will likely expand by 6.8% in 2010, a rebound from -1.7% in 2009.

Industrial production slowed down to 9.4% yoy in Table 1 Industrial Production Index
June, from +12.3% in May and a high of +14.2% in March (2005 = 100)
Total Mfg Electricity Mining
(see Table 1). This was the slowest pace of growth in four
(% yoy)
months, suggesting that industrial activities are moderating.
The slowdown was due to a more moderate increase in 2008 0.7 0.6 1.2 0.8
2009 -7.7 -10.0 0.8 -4.3
manufacturing production, which slackened to 13.3% yoy
in June, the slowest pace in four months and from +18.4% 2009 Q 3 -7.0 -9.1 3.2 -4.2
Q4 2.5 4.4 10.3 -3.4
in May. This was in tandem with a slowdown in the exports
of manufactured goods and was mainly on account of a 2010 Q1 11.0 15.3 18.8 0.8
Q2 10.8 15.6 9.6 0.6
slowdown in the production of electronic & electrical products;
refined petroleum products; chemical & chemical products; 2010 Apr 10.7 15.1 12.2 0.8
non-metallic mineral products, basic metal & fabricated metal May 12.3 18.4 11.5 -0.2
Jun 9.4 13.3 5.2 1.3
products; and wood & wood products. A slowdown in
electricity output, which weakened to 5.2% yoy in June, 2009 (Jan-Jun) -12.8 -16.8 -4.9 -4.7

from +11.5% in May, worsened the situation. These were, 2010 (Jan-Jun) 10.9 15.5 13.9 0.7

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 10 August 2010

however, mitigated by a pick-up in mining output, which

Table 2 : Industrial & Manufacturing Production
rebounded to increase by 1.3% yoy in June, from -0.2%
in May. Stripping out seasonal factors, industrial % mom
production grew at a slower pace of 10.8% yoy in June, Total Total Electricity Mining
compared with +12.4% in May, indicating that industrial IPI Mfg
activities are heading south. 2010 Apr -3.8 -3.6 -2.2 -4.6
May 3.2 3.5 3.3 2.4
Jun -2.8 -1.4 -5.6 -5.8
Mom, industrial production fell by 2.8% in June, compared
(3-month moving average)
with +3.2% in May (see Table 2). The decline was across
% mom % yoy
the board, from the manufacturing to electricity and mining
sectors. Manufacturing production and electricity output Total Total Elec- Total Total Elec-
IPI Mfg tricity IPI Mfg tricity
contracted by 1.4% and 5.6% mom respectively in June,
compared with the corresponding rates of +3.5% and 2010 Apr -0.5 0.5 1.1 Apr 10.0 14.3 16.1
May 4.4 4.9 5.4 May 12.4 18.0 15.9
+3.3% in May. Similarly, mining production fell by 5.8%
Jun -1.2 -0.5 -1.5 Jun 10.8 15.6 9.6
mom in June, after rising by 2.4% in May.

Cumulatively, industrial production moderated to 10.8%

Table 3 : GDP By Demand Aggregate
yoy in the 2Q, from +11.0% in the 1Q. Slower growth was (2000=100)
due to a slowdown in electricity and mining output, which '10f ‘11f 2009 2010
eased to 9.6% and 0.6% yoy respectively in the 2Q, from
Q2 Q3 Q4 Q1 Q2e
the corresponding rates of +18.8% and +0.8% in the 1Q.
% Growth in Real Terms
These were, however, mitigated by a slight pick-up in
manufacturing production, which inched up to 15.6% yoy in GDP 6.8 5.0 -3.9 -1.2 4.4 10.1 8.1
the 2Q, from +15.3% in the 1Q and +4.4% in the 4Q of last Consumption:
year, underpinned by the resilient domestic demand during Private 5.0 6.0 0.3 1.3 1.6 5.1 5.4
Public -1.5 4.5 1.5 9.4 0.7 6.3 1.8
the quarter. Based on the preliminary numbers, we estimate
Total Invest'nt 9.0 8.6 -9.6 -7.9 8.2 5.4 13.3
that real GDP growth is likely to have moderated to
Exports 1 1 . 4 7 . 9 -17.9 -12.9 6.0 19.3 12.6
8.1% yoy in the 2Q, from the peak of +10.1% in the 1Q Imports 1 7 . 2 1 0 . 5 -19.4 -13.2 7.0 27.5 21.9
(see Table 3). This was due to a slowdown in exports, which Agg domestic
was mitigated by a pick-up in domestic demand. demand 4.9 6.4 -2.2 0.1 2.8 5.4 6.9

(f):RHBRI's forecasts (e):RHBRI’s estimates

Real exports are likely to have moderated to 12.6% yoy in
the 2Q, from +19.3% in the 1Q. This was the first easing
after returning to positive growth in the 4Q, due to softer global demand and as the exceptionally strong growth due to
the low base effect normalised. Slower growth was reflected in a slowdown in demand for the country’s exports from
the US and European Union. Similarly, exports to China, Hong Kong and Asean slackened during the quarter. These
were, however, mitigated by a pick-up in exports to Japan. In terms of products, the slowdown in exports was due to
slower increases in the exports of electrical & electronic (E&E) products and non-E&E manufactured goods. These were,
however, mitigated by a pick-up in the exports of major commodity products.

Domestic demand, on the other hand, is estimated to have grown at a faster pace of 6.9% yoy in the 2Q, compared
with +5.4% in the 1Q and +2.8% in the 4Q of last year. This was on account of a stronger growth in consumer
spending, which is estimated to have held up relatively well at 5.4% yoy in the 2Q, faster than +5.1% recorded in the
1Q, amidst a drop in confidence and a slowdown in job market. Indeed, consumption credit strengthened to 10.7% yoy
at end-June, from +9.5% at end-March and compared with +7.7% at end-2009, indicating that consumers continued to
borrow and spend. Similarly, sales tax collection fell by a smaller magnitude of 2.1% yoy in the 2Q, compared with -
29.8% in the 1Q. However, there were signs of weakness in consumer spending as reflected in a moderation in new
car sales, while the imports of consumption goods slowed down during the quarter. Also, service tax collection slowed
down in the 2Q, while the Malaysian Institute of Economic Research’s (MIER) consumer sentiment index fell to 110.4
during the quarter.

In the same vein, private investment is estimated to have turned around and recorded a positive growth in the 2Q
even though business confidence has weakened somewhat. As it stands, the imports of capital goods rebounded to
+26.5% yoy in the 2Q, from +9.6% in the 1Q and compared with +18.4% in the 4Q, suggesting that businesses continued
to spend, albeit cautiously. Similarly, corporate loan growth strengthened in June, on the back of a pick-up in business
loans which grew at a faster pace of 7.2% yoy in June, compared with +4.3% in March. This was, however, offset partially
by a decline in loans extended for small- and medium-scale enterprises (SMEs), which fell by 0.3% yoy in June, compared
with +3.1% in March.

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 10 August 2010

Public investment, however, is estimated to have slowed down to 11.0% yoy in the 2Q, from +11.9% in the 1Q, in
line with a slowdown in the disbursement of government funds. Nevertheless, fixed capital formation is estimated
to have grown at a faster pace of 13.3% yoy in the 2Q, compared with +5.4% in the 1Q, due to a turnaround in private
investment. The public consumption expenditure, however, is estimated to have slowed down during the quarter, after
a strong pick-up in the previous quarter.

On the supply side, value added in the manufacturing sector

Table 4 : GDP By Industrial Origin
is estimated to have moderated to 15.2% yoy in the 2Q, from (2000=100)
+16.9% in the 1Q and after returning to a growth of 5.3% for '10e '11f 2009 2010
the first time in a year in the 4Q (see Table 4). As it stands,
output of the export-oriented industries moderated to 17.4% Q2 Q3 Q4 Q1 Q2e

yoy in May, after reaching a high of +21.3% in March. A pick-

% Growth in Real Terms
up in output of domestic-oriented industries, however, mitigated
GDP 6.8 5.0 -3.9 -1.2 4.4 10.1 8.1
the slowdown. Similarly, the services sector is estimated to
Agriculture 3.2 2.8 0.4 -0.4 5.9 6.8 2.0
have grown at a more moderate pace of 6.5% yoy in the 2Q,
Mining 2.1 2.0 -3.5 -3.6 -2.8 2.1 2.5
compared with +8.5% in the 1Q, in tandem with a slower
Manufacturing 11.2 8 . 0 -14.5 - 8 . 6 5.0 16.9 15.2
increase in trade activities. Also, construction activities are
Construction 4.8 2.8 4.5 7.9 9.3 8.7 6.8
estimated to have moderated somewhat to 6.8% in the 2Q,
from +8.7% in the 1Q and after hitting a 13-year high of Services 6 . 1 4 . 8 1 . 7 3 . 4 5 . 2 8 . 5 6.5

+9.3% in the 4Q, in line with a slower increase in the (f):RHBRI's forecasts (e):RHBRI’s estimates
Government’s stimulus spending and housing activities. In
the same vein, agriculture output is estimated to have slowed
down in the 2Q, due to a decline in palm oil production and growth in the previous quarter was boosted by the low base
effect. Mining output, however, is estimated to have picked up during the quarter, on the back of a stronger increase
in LNG production.

Going forward, the global economy is likely to slow down in 2H 2010, as worldwide stimulus spending dissipates
and austerity measures in some European countries to address fiscal deficit and debt problems begin to bite. This will
likely be compounded by the policy normalisation and tightening measures introduced in some countries, particularly in
Asia, that will likely slow down economic activities in these countries. As it stands, signs of a slowdown in the global
economy are becoming more apparent. Indeed, global manufacturing and services activities softened for the third
consecutive month in July. In the same vein, the OECD composite leading indicator’s 12-month rate of change has
peaked in March and it moderated for three consecutive months to 6.7% in June, from +8.3% in May, indicating that
OECD economies are likely to ease in the months ahead.

Despite the weakness, we do not expect the global economy to fall into a double dip even though there is
a risk of a sharper-than-expected slowdown, given that policy normalisation and tightening remain gradual. Also,
the US economic recovery is becoming more sustainable, as its recovery which started from the government stimulus
and inventory rebuilding, has now spread to consumer spending. In Europe, we expect the sovereign debt problems to
be manageable despite the lingering concerns, following the announcement of an emergency stabilisation loan of €750bn
and the €110bn rescue package for Greece. Indeed, Spain, Portugal, Ireland and Greece have successfully sold their
bonds since 13 July and the results of the stress test also helped as well. Nonetheless, the austerity drives in Europe
will likely affect Malaysia’s exports to some extent given that 10.7% of the country’s exports went straight to Europe.
There would be indirect impact as well since 13% of Malaysia’s exports go to China, and Europe is China’s largest export
market (accounting for 19.7% of its total exports). As a whole, in tandem with a more moderate growth in the global
economy, we expect the country’s real exports to slow down to 7.6% yoy in 2H 2010, from +15.9% in the 1H,
bringing the full-year growth to +11.4% compared with -10.4% in 2009.

In the US, the economy is showings signs of moderating, after recording a slower annualised rate of +2.4% in the 2Q.
As it stands, retail sales fell by 0.5% mom in June, the second straight month of decline, while factory output fell by
0.4% mom during the month, the most in a year. Similarly, existing home sales declined for the second consecutive
month in June and housing starts fell to the lowest level in eight months in June. This points to a renewed weakness
in the housing sector, after the expiration of the tax incentive in April and its recovery will likely be slow in the months
ahead. Also, private employers added fewer workers to payrolls in May-July, compared with March-April. Elsewhere,
manufacturing activities slowed down for the third straight month in July, while services activities bounced back during
the month but was off the peak recorded in May. As a whole, the US economy is projected to grow at a more
moderate pace of 2.8% in 2H 2010, compared with +3.1% in the first half, bringing the full-year growth to around
+3.0%, a rebound from -2.4% in 2009.

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 10 August 2010

Similarly, the austerity drives will likely hurt some countries in the Euroland but will likely be cushioned by Germany, which
could leverage on the weak euro to export. As it stands, manufacturing and services activities in the region rebounded
in July, after a slowdown in June, while business and consumer confidence improved somewhat in July. In the same vein,
the Japanese economy will likely slow down in the 2H of the year, on the back of a slowdown in global demand for
the country’s exports. In China, manufacturing activities slowed down to the slowest pace in more than a year in July,
while industrial production headed south for the third straight month in June. Similarly, retail sales grew at the weakest
pace in three months in June and fixed-asset investment in urban areas slowed down in the 1H of the year. As a whole,
the key economic indicators suggest that China’s economy is likely to slow down further in the 2H of the year, after
recording a more moderate growth of +10.3% yoy in the 2Q.

Meanwhile, a softer export growth will likely translate into slower increases in jobs and production, which will likely affect
consumer spending and business investment as well. As a result, we envisage domestic demand to ease to 3.8%
yoy in 2H 2010, from +6.1% in the 1H, bringing the full-year growth to 4.9% in 2010, a rebound from -0.5% in 2009.
This will likely be reflected in a more moderate increase in consumer spending, which is projected to grow at a slower
pace of 4.7% yoy in the 2H versus +5.3% in the 1H. Already, consumer spending is showing signs of weakness as
reflected in a moderation in new car sales, the imports of consumption goods and service tax collection in the 2Q.
Consumer spending, however, will likely be resilient on the back of high savings and rising consumerism. For the full-
year, consumer spending, however, will likely bounce back to +5.0% in 2010, from +0.7% in 2009.

Similarly, the private investment is projected to soften in the 2H of the year, as businesses turn cautious when excess
production capacity builds up. As a result, businesses will not be in a hurry to invest, they are likely to delay their
investment. In the same vein, public investment is projected to expand at a slower pace in the 2H of the year, as
the government stimulus fizzles out. Consequently, we expect fixed capital formation to ease to 8.4% yoy in 2H 2010,
from +9.5% in the 1H, bringing the full-year growth to 9.0% during the year, compared with -5.6% in 2009. Public
consumption, on the other hand, will likely contract by in the 2H of the year, on the back of a fiscal consolidation. As
a whole, we expect real GDP growth to slow down to 4.5% yoy in 2H 2010, from +9.1% in the 1H. For the full-
year, real GDP will likely expand by 6.8% in 2010, a rebound from -1.7% in 2009.

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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and
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