State of the Nation: Double-digit streak in export data continues in July, but caution is warranted

July’s foreign trade data was among the first set of economic figures for 2H2022 to be unveiled last Friday. Export growth continued its double-digit streak for the 12th consecutive month, but remained below economists’ expectations.

In July, exports increased by 38% year on year (year-on-year), with a total value of RM134.07 billion. The strong double-digit growth is mainly due to last year’s weak base effect. As of July 2021, total exports stood at RM97.12 billion. Economists expected growth of 39%.

Export growth was driven by increased demand for electrical and electronic (E&E) products, petroleum products and liquefied natural gas (LNG).

July imports grew at an even faster pace, increasing by 41.9% to RM118.58 billion, while the trade surplus widened by 14.3% to RM15.49 billion.

While foreign trade data continued its double-digit streak of year-on-year growth, on a monthly basis (mom), the data suggests that foreign trade may have already peaked. Exports contracted 8.2% month on month while imports fell 4.5%. The trade surplus fell by 29.1%.

Economists warn that export growth is likely to moderate going forward due to slowing global demand, lower commodity prices and a higher base effect.

Julia Goh, senior economist at United Overseas Bank (M) Bhd (UOB), says there are signs the global tech cycle is entering a downturn. She pointed out that commodity prices, especially that of crude palm oil (CPO), have fallen sharply lately.

Three-month CPO futures are currently trading at RM4,100 per tonne, down from over RM7,000 per tonne in April.

On a positive note, the E&E production base grew significantly in June, Goh says. “We believe this could signal a sustainable structural improvement for the segment given rising foreign direct investment (FDI) and new production facilities in the E&E sector, which would further propel the sector’s contribution to overall production to The future Based on the two-year production trend, the sector has maintained an upward trend.

It forecasts that export growth for the whole of 2022 will reach 18% after growth of 26.1% in 1H2022.

Lee Heng Guie, Executive Director of the Socio-Economic Research Center (SERC) of the Associated Chinese Chambers of Commerce and Industry Malaysia (ACCCIM), forecasts that exports will slow at an average rate of 15.2% in 2H2022, compared to 26.1% in 1H2022.

It’s also possible that the double-digit streak seen in the export growth data will end soon.

“The high export levels that started in September 2021 would result in low single-digit export growth in 4Q2022. The moderation in exports is expected to reduce the trade surplus, which will impact gross domestic product (GDP) growth ) real as of 4Q2022,” Lee says.

4T economic data to watch closely

Just last week, Bank Negara Malaysia reported 2Q2022 GDP performance that beat expectations as the economy grew 8.9% year-on-year. Economists say some of the growth in 2Q can be attributed to the weak base effect resulting from last year’s lockdowns, but there was also an underlying strength seen as the country moves into the endemic phase of Covid-19, in addition to the various tax support measures made available by the government.

It looks like the high GDP numbers are likely to continue in 3Q2022. Maybank Investment Bank Research said in an August 12 report that it expects mid-to-high single-digit growth in the third quarter, which partly reflects the weak base effect from a year ago when the GDP contracted 4.5% year-on-year as the country experienced further lockdown.

But the real test for the economy will come in the fourth quarter.

What’s worth noting is that consumer spending accounts for 58.8% of the Malaysian economy, says SERC’s Lee. “The drivers of robust private consumption growth in 2Q [18.3% y-o-y compared with 5.5% in 1Q] were due to the release of pent-up consumer demand supported by continued cash handouts, the fourth withdrawal from Employees Provident Fund (EPF) accounts, estimated at RM45 billion, and higher demand during festive celebrations of Hari Raya. Added to this is a revival of domestic tourism, although largely supported by local tourists, as foreign tourists are gradually returning.

All of that extra stimulus handed out in light of the pandemic would have already ended and one wonders if consumer spending will continue to be robust in 2H2022 and into 2023. Plus, that’s not just the end stimulus measures measures that can hinder the strength of consumer spending, but also the rise in inflation.

It should be noted that the lower EPF contribution rate of 9% for employees during the pandemic fell to 11% in July, leaving much less money in their wallets and likely to cause some to reduce their expenses.

Lee says that despite an increase in nominal wage growth in 2Q2022, the price increase has negated its impact. “As a result, many households are dipping into their savings or going into debt to fund their spending.”

While the pace of growth is expected to slow going forward, the UOB Goh remains positive on the economic outlook for 2H2022. She clarified that despite the multiple external headwinds, the banking group remains positive on the economic outlook in 2H2022 given the weak base effect and the country’s transition to endemicity.

“Despite signs of potential weakness in some advanced economies and a slowing Chinese economy, the outlook for regional growth, particularly for Asean, remains encouraging, bolstered by reopening engines. Given the strong impression of the GDP of 6.9% in 1H2022, we have raised our GDP estimate for the full year 2022 to 6.5%, implying 6% growth for 2H2022. Finance is revising its growth estimates for 2022 upward when the federal budget is tabled in October,” Goh said.

UOB’s GDP growth forecast for 2022 is above the official estimate of 5.3% to 6.3%.

Maybank IB Research, however, forecasts slower growth in 2H2022 and 2023 given rising inflation and interest rate hikes that will lead to slower global growth, as well as the unwinding of stimulus measures. national measures put in place during the pandemic. In an August 12 report, the research house kept its GDP forecasts for 2022 and 2023 at 6% and 4% respectively.

Goh acknowledges that the outlook for 2023 is expected to be more challenging amid uncertainties surrounding the global economy. But it does not see a global recession in its base case scenario, although it recognizes growing recession risks for some economies amid the ongoing Russia-Ukraine crisis, high costs, prolonged supply chain disruptions. supply, tighter global financial conditions, ongoing Covid-19. risks with potential new variants and persistent geopolitical risks.

“Malaysia continues to have adequate domestic growth engines to sustain momentum, although more prolonged and higher external headwinds would affect local consumer and business sentiment, which in turn could drive demand and investment. more moderate to come. Pending more certainty on global developments and the announcement of Malaysia’s 2023 budget on October 28, we are maintaining our 2023 real GDP growth projection of 4.8% for now,” Goh said.