PP 7767/09/2011(028730)

Malaysia
Economic Highlights
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MARKET DATELINE

11 October 2010

A Slight Pick-up In Industrial Production In August,

But Economic Growth Still Trending Downward In The
3Q

◆ Industrial production rebounded to +4.0% yoy in September, after slowing down to record the slowest pace
of growth of +3.4% in eight months in July. Despite the rebound, industrial activities in general are still weak. The
pick-up was underpinned by a stronger growth in electricity output and a smaller decline in mining output. These
were, however, offset partially by a slowdown in manufacturing production during the month.

◆ The slowdown in industrial and manufacturing production in July-August suggests that industrial activities will likely
weaken in the 3Q. As a result, we expect real GDP growth to slow down to 5.6% yoy in the 3Q, from +8.9%
in the 2Q.

◆ Going forward, the slowdown in the world’s major economies, from the US to Japan and China, has become more
widespread since the 2Q and the slowing growth in these economies will likely soften further in the 2H of the year
and extend into 1H 2011. As a whole, we expect the country’s exports to slow down in 2011, after recording
a strong pick-up in 2010.

◆ While exports are likely to slow down, we expect domestic demand to be resilient and will hold up at 5.5% in 2011,
albeit at a more moderate pace, compared with +5.6% estimated for 2010 and -0.5% in 2009. As a whole, we
expect real GDP growth to slow down to 5.0% in 2011, from +7.3% estimated for 2010.

Industrial production rebounded to +4.0% yoy in

September, after slowing down to record the slowest pace Table 1 Industrial Production Index
of growth of +3.4% in eight months in July (see Table 1). (2005 = 100)
Despite the rebound, industrial activities in general are still Total Mfg Electricity Mining
weak. The pick-up was underpinned by a stronger growth
in electricity output, which expanded at a faster pace of (% yoy)
4.9% yoy in August, compared with +4.4% in July. This
2008 0.7 0.6 1.2 0.8
was aided by a smaller decline in mining output, which
2009 -7.7 -10.0 0.8 -4.3
fell by 2.9% yoy in August, compared with -5.9% in July.
These were, however, offset partially by a slowdown in 2009 Q 3 -7.0 -9.1 3.2 -4.2
manufacturing production, which eased to 6.8% yoy in Q4 2.5 4.4 10.3 -3.4
August, the slowest growth in nine months and from +7.4% 2010 Q1 11.0 15.3 18.8 0.8
in July. This suggests that manufacturing production is
Q2 11.1 16.1 9.6 0.6
losing momentum, in tandem with a slowdown in the exports
of manufactured goods, which slowed down for five 2010 Jun 9.3 13.1 5.2 1.3
consecutive months to 8.0% yoy in August. The slowdown July 3.4 7.4 4.4 -5.9
in manufacturing production was mainly on account of a Aug 4.0 6.8 4.9 -2.9
slower increase in the production of petroleum, chemical,
2009 (Jan-Aug) -11.4 -14.9 -2.8 -4.7
rubber & plastic products. These were, however, mitigated 2010 (Jan-Aug) 9.1 13.4 11.4 -0.6
by a pick-up in the production of electronic & electrical
products (+11.2% yoy in August versus +8.8% in July);

Peck Boon Soon

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

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 11 October 2010

textile, wearing apparel, leather products & footwear; non-metallic mineral products, basic metal & fabricated metal
products; and transport equipment & other manufactures metal products. Stripping out seasonal factors, industrial
production grew at a slower pace of 5.5% yoy in August, compared with +8.2% in July and +11.1% in June, indicating
that industrial activities are weakening.

Mom, industrial production fell by 1.2% in August, after

Table 2 Industrial & Manufacturing
a rebound to +1.9% in July (see Table 2). This was due
Production
to declines in manufacturing production and electricity
output, which fell by 0.7% and 0.2% mom respectively % mom

in August, compared with the corresponding rates of Total Total Electricity Mining
+1.7% and +2.7% in July. Similarly, mining production IPI Mfg
contracted by 2.8% mom in August, after bouncing back 2010 Jun -2.9 -1.5 -5.6 -5.8
to +2.1% in July. July 1.9 1.7 2.7 2.1
Aug -1.2 -0.7 -0.2 -2.8
The slowdown in industrial and manufacturing production
(3-month moving average)
in July-August suggests that industrial activities are likely
to expand at a slower pace in the 3Q. As a result, we % mom % yoy
expect real GDP growth to slow down to 5.6% yoy
Total Total Elec- Total Total Elec-
in the 3Q, from +8.9% in the 2Q.
IPI Mfg tricity IPI Mfg tricity

Going forward, the slowdown in the world’s major 2010 Jun -1.2 -0.6 -1.5 Jun 11.1 16.0 9.6
economies, from the US to Japan and China, has become July 0.4 0.7 0.1 July 8.2 12.8 7.0
more widespread since the 2Q, after a strong rebound Aug -0.8 -0.2 -1.1 Aug 5.5 9.1 4.8
from the worst recession since the world war II. The
latest economic data releases suggest that the growth in
these countries, including the Euroland, will likely soften further in the 2H of the year and extend into 1H 2011.
Also, effect of the dissipating global stimulus spending will likely be felt in the 2H. Already, global manufacturing activities
have slowed down for the fifth straight month and it grew at the slowest pace in 14 months in September. In particular,
manufacturing new orders weakened to the slowest pace of growth in 15 months and since it turned around to expand
in July 2009, indicating that global manufacturing activities are likely to moderate further in the months ahead. In the
same vein, global services activities slowed down for the fifth consecutive month in September. Similarly, the OECD
composite leading indicator’s 12-month rate of change moderated for the fourth consecutive month to 5.3% in July, from
+6.8% in June and after reaching a high of +10.3% in March, indicating that OECD countries’ economies are likely to
expand at a slower pace in the months ahead.

As a result, the US Federal Reserve is moving closer to implement a new round of quantitative easing. This
will likely prevent the US economy from falling back into a recession, in our view. Similarly, the Bank of Japan (BOJ)
stepped up its monetary easing on 5 October by lowering its benchmark interest rate to a range of 0-0.1% and expanding
its balance sheet to buy government bonds and other assets. The European Central Bank (ECB), however, said that
policymakers are in the same mood as a month ago and committed to phase out their unlimited lending programme,
after extending the liquidity support into early 2011 on 2 September. In Asia, we believe most central banks in the region
are likely to slow down their policy tightening or pause in view of the risk of a sharper slowdown in the global economy
and a sharp appreciation in currencies due to inflow of foreign capital.

Meanwhile, the US personal consumption expenditure (PCE) slowed down to an annualised rate of 1.7% in August, from
+1.9% in July and the peak of +2.6% in May. This was the third consecutive month of easing and the slowest pace
of increase in seven months, suggesting that consumer spending is slowing down but will likely remain resilient. Similarly,
manufacturing activities weakened to the slowest pace in 10 months in September, although services activities rebounded
during the month. As a whole, the US economy is projected to moderate to 2.5% in 2011, from +2.7% estimated for
2010.

Similarly, Japan’s manufacturing activities contracted in September, the first in 15 months, and exports eased for the sixth
straight month in August, suggesting that the export-dependent Japanese economy will likely turn weaker in the months
ahead. In the same vein, the Euroland’s economic growth is likely to have peaked in the 2Q, as its export engine,
which powered the 2Q’s GDP growth, has started to moderate.

As other key economic indicators point to a slowdown in China’s economic growth, its Purchasing Managers Index (PMI)
for the manufacturing sector rose to 53.8 in September, from 51.7 in August and a 17-month low of 51.2 in July. This
was the third straight month of picking up, suggesting that manufacturing activities expanded at a faster pace during the

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 11 October 2010

month. As a whole, the readings suggest that economic activities in China have stabilised somewhat in the 3Q, after
easing to +10.3% yoy in the 2Q.

In tandem with a more moderate growth in the global economy, demand for electrical & electronic (E&E) products,
which accounts for about 45% of Malaysia’s total exports in 2009, and other non-E&E manufactured goods is likely to
soften in 2011. Already, worldwide semiconductor sales eased to 32.6% yoy in August, from +37.0% in July and after
reaching a high of +59.9% in March. Also, the Semiconductor Industry Association expects chip sales to grow at a slower
pace of 6.3% in 2011, compared with +28.4% in 2010. As a whole, in tandem with a slowdown in the global demand,
we expect the country’s real exports to slow down to 7.6% in 2011, after a rebound to +11.7% estimated for 2010.

While exports are likely to slow down, domestic demand will likely be resilient, on the back of a sustained increase in
consumer and business spending, albeit at a more moderate pace. As a result, we expect domestic demand to hold
up at 5.5% in 2011, albeit at a more moderate pace, compared with +5.6% estimated for 2010 and -0.5% in 2009.
In line with a weaker export growth, which will likely translate into a slowdown in production and employment, consumers
are likely to turn cautious in spending. As a result, consumer spending is projected to moderate to 5.4% in 2011,
but remain relatively strong compared with +5.6% estimated for 2010. Apart from weaker job prospects, the reinstatement
of employees’ contribution to the Employees Provident Fund (EPF) back to 11%, from 8% when it was cut in 2009, will
likely affect consumer spending somewhat. Consumer spending, however, will likely remain resilient, on the back of high
savings and rising consumerism.

Similarly, we expect businesses to slow down their investment due to economic uncertainties. In addition, the surge in
the ringgit in a short span of time, coupled with the removal of subsidies and rising borrowing costs which happened at
around the same time, is likely to squeeze companies’ earning and make the business environment more challenging,
especially for exporters. As a result, the private investment is envisaged to soften to 7.8% in 2011, after recovering
to +8.6% estimated for 2010. In the same vein, public investment is projected to expand at a slower pace of 4.9%
in 2011, after two consecutive years of strong growth, as the previous two years’ growth was boosted by the Government’s
stimulus spending which will unlikely be repeated next year. Consequently, we expect fixed capital formation to ease
to 6.3% during the year, from +9.7% estimated for 2010. A stronger growth in public consumption, however, will likely
help mitigate the slowdown. We expect public consumption to grow by 4.5% in 2011, after slipping into a contraction
of 0.4% estimated for 2010. As a whole, we expect real GDP growth to slow down to 5.0% in 2011, from +7.3%
estimated for 2010.

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