• Labor productivity tapered off to 1.7% in 3Q18

• Total employment rose by 2.6% yoy in 3Q18

• Declining labor productivity in agriculture sector

• Better employment in agriculture and construction sector

• Downward trend in labor productivity could give more economic challenges

Malaysia’s labour productivity stated as a ratio of value added per employment, or output per labor, continued to taper off in 3Q18 to 1.7% yoy from 2.0% registered in the previous quarter. Labour productivity has been decelerating since 3Q17 and 3Q18 labour productivity was the lowest ever recorded from the historical data available since 2015. On the flipside, the total employment showed a stable upward trend since 4Q16 and increased by 2.6% yoy in 3Q18. It was the highest employment growth after 1Q15 which was registered at 3.3% yoy.

The slower pace of labour productivity in 3Q18 was mainly driven by 1.9% yoy drop in agriculture sector (2Q: 1.3%). Meanwhile, the productivity of construction and mining sector moderated in 3Q18 and rose by 3.2% yoy (2Q18: 4.0%) and 0.8% yoy (2Q18: 5.2%) respectively. In contrast, manufacturing and services sector’s productivity improved to 2.2% yoy (2Q18: 1.5%) and 3.9% yoy (2Q18: 2.6%) respectively in 3Q18.

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, 16.8% and followed by agriculture, 12.5%.

The higher employment growth in 3Q18 was supported by all major sector except for mining as it dropped by -5.3% yoy. Nevertheless, it shows a smaller decline as compared to the previous quarter’s 7.0% drop. Meanwhile, the employment in agriculture sector rebounded to 0.6% yoy after slipping by -3.7% yoy in the last quarter whilst construction sectors gained by 1.4% yoy, double the growth of last quarter’s 0.7% yoy. However, the employment in manufacturing and services sector moderated by 2.7% yoy (2Q18: 3.4%) and 3.2% yoy (2Q18: 3.9%) respectively in 3Q18.

Downward trend in labor productivity could give more economic challenges

Malaysia’s labor productivity grew 1.7% in 3Q17 after registering 2.0% growth in 2Q18. The growth in labor productivity has slowed down since 3Q17.

As Malaysia continues to strive toward high income status, accelerating productivity growth has become the country’s central economic policy challenge. Productivity growth has become increasingly important and while the GDP growth rate has proven resilient in recent years, structural constraints are emerging. Declining oil and gas output, coupled with the slowing growth of the mining sector, has reduced the pace of capital accumulation. Weakening external demand and intensifying global competition in Malaysia’s key export industries confirm the necessity of increasing productivity levels.

Productivity is increasingly vital to Malaysia’s international competitiveness, and a welleducated labor force, a conducive climate for innovation, efficient market mechanisms, advanced physical infrastructure, and highly-capable public institutions are essential to the continued evolution of its market position, and the success of its long-term structural transformation. In this difficult context, a sustained increase in private investment, coupled with improvements in productivity, will be necessary to maintain a sustainable economic growth trajectory.

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 further to 4.4% in 3Q18 from 4.5% yoy in 2Q18. Given the external and domestic challenges at hand, GDP growth is expected to ease to 4.8% in 2018 (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 - 26 Nov 2018