• Labor productivity moderated to 2.0% in 2Q18

• Total employment increased by 2.4% yoy in 2Q18

• Lower labor productivity for services, manufacturing and mining sector

• Agriculture and mining sector registered negative growth in employment

• Slower GDP growth could affect productivity

Malaysia’s labour productivity per employment moderated to 2.0% yoy in 2Q18 from 3.0% posted in the previous quarter. The productivity has been in downward trend since 3Q17. In contrast, the total employment showed a stable uptrend since 4Q16 and increased by 2.4% yoy in 2Q18. It was the highest employment growth after 2Q15 which was recorded at 2.5% yoy.

The slower pace of labour productivity in 2Q18 was impelled by the slowdown efficiency in majority of the main sectors namely; services (2Q18: 2.5%; 1Q18: 4.6%), manufacturing (2Q18: 1.5%; 1Q18: 3.3%) and mining (2Q18: 5.2%; 1Q18: 8.3%). Nevertheless, the productivity of construction sector surged 4.0% yoy in 2Q18 after a small 0.7% increase logged in the preceding quarter, whilst agriculture sector rebounded by 1.3% yoy after falling 1.4% in 1Q18.

In terms of employment, services sector attributed the highest share over total employment in Malaysia which holds at 61.6%. The second largest sector is manufacturing, 16.9% and followed by agriculture, 12.3%. The employment growth in 2Q18 was highly supported by services (2Q18: 3.9%; 1Q18: 1.8%) and manufacturing (2Q18: 3.4%; 1Q18: 2.0%).

The employment for construction sector in 2Q18 eased to 0.7% yoy after increasing significantly at 4.2% for two consecutive quarters. On the flipside, agriculture and mining sector’s employment declined by -3.7% yoy and -7.0% yoy respectively. This marked the thirds consecutive months of negative growth for mining sector (1Q18: -7.6%; 4Q17: -5.5%).

Slower GDP growth could affect productivity

Malaysia’s labor productivity grew 2.0% in 2Q18 after registering 3.0% growth in 1Q18. The growth in labor productivity has slowed down since 3Q17. The decline in the labor productivity growth was predominantly due to the within effect. Looking at the within effect for each economic sector, it is found that the decline in labour productivity is not isolated to any particular sector. This was particularly prominent in the last four quarters in which within effect of the agriculture sector fell by 75% from 3Q17 to 2Q18, while that of the manufacturing and services sector fell by 71% and 31% respectively. These three major economic sectors employ 90% of all workers in the Malaysian economy.

If the current trajectory of broad-based slowing labour productivity growth is not reversed, the economic development of Malaysia could be at risk going forward. The trend of falling labour productivity growth is one of the most pressing economic challenges. If weak productivity growth is to persist for longer period, living standards could be seriously undermined, and economic and social stability could be imperilled.

Malaysia’s GDP growth slowed to 4.5% yoy in 2Q18 from 5.4% in 1Q18. Given the external and domestic challenges at hand, we project GDP growth will ease to 4.8% in 2018 from our previous estimate of 5.3% (2017: 5.9%). This may have a negative impact on productivity which is expected to grow by 3% to 4% in 2018.

Source: BIMB Securities Research - 23 Aug 2018