Decline in Demand for Manufactured Goods Drags Exports in June

Malaysia’s exports growth contracted by 3.1% in June, after remaining in positive territory for the past two months (2.5% in May and 1.1% in April) partly due to seasonal factors. However, this was below market expectations of a 1.9% decline. The decline in exports was reflected in lower demand for manufactured goods, which contracted by 5.0% yoy in June after rising by 2.5% in May. Meanwhile, exports of agriculture goods also declined by 0.8% yoy in June, from an increase of 15.3% in May. However, exports of mining goods rose by a double-digit growth rate of 15.4% yoy in June, after declining by 10.9% in May.

Exports of manufactured goods were dragged by weak demand for electrical and electronic (E&E) products, manufactures of metal, machinery, equipment and parts, rubber products and wood products. In addition to seasonal factors, we believe the decline in exports was also attributable to weakness in demand for Malaysia’s E&E products, as global semiconductor sales declined further by 14.6% yoy in May 2019, and remained in negative territory for the past five months since January.

On the external environment, the global manufacturing PMI deteriorated further from 49.4 in June to 49.3 in July, its lowest level since October 2012, and this suggests that manufacturers will remain cautious on new orders and international trade going forward, on the back of unfavourable global economic conditions. US President Trump threatened recently that the US will impose a 10% tariff on the remaining US$300bn in Chinese imports beginning 1 September 2019. While we believe exports of Malaysia’s E&E products will benefit from some trade diversion or import substitution, it will likely be at a slower pace.

As for demand for agriculture goods, exports for palm oil and palm oil-based agriculture products was supported by demand for palm oil, which expanded by 7.9% yoy as reflected in higher volumes. Exports of mining goods were supported by higher demand for crude petroleum and liquefied natural gas (LNG), as reflected in higher volumes and Average Unit Value (AUV).

Slower Exports to China, Japan and ASEAN in June

Malaysia’s exports to China contracted sharply by 12.0% yoy in June following a 2.2% decline in May, dragged by lower demand for petroleum products, E&E products, metalliferous ores and metal scrap as well as manufactures of metal. Likewise, exports to Japan decreased by 13.5% yoy in June after rising by 7.5% in May, due to lower exports for LNG, wood products and manufactures of metal.

Meanwhile, exports to ASEAN also declined by 0.2% yoy in June (4.7% in May), due to lower exports for E&E products, petroleum products, transport equipment and processed food. Due to external uncertainties relating to trade tensions between the US and China, we believe intra-regional trade has trended lower, as reflected also in the Asean manufacturing PMI, which slowed further for the second consecutive month to 49.5 in July from 49.7 in June.

However, Malaysia’s exports to the EU unexpectedly rose by 1.0% yoy in June after remaining in negative territory for the third consecutive month, supported by higher demand for petroleum products and palm oil-based manufactured products. Exports to the US rose by 8.8% yoy in June, albeit slower than 11.7% in May, attributed to higher exports of E&E products, manufactures of metal, manufactures of plastics, processed food and wood products.

Gross Imports Contracted Sharply by 9.2% Yoy in June

Gross import growth declined by 9.2% yoy in June, after increasing by 1.4% in May, and growth declined in all segments. In particular, imports of intermediate goods contracted by 2.5% yoy in June from a 6.5% increase in May, due to lower imports of processed industrial supplies, especially iron and steel. This also reflected the possibility of slower exports in the months ahead, as intermediate goods is an indicator of future exports. Similarly, imports of capital goods declined by 23.6% yoy (-6.2% in May), particularly lower imports of parts of machinery and mechanical appliances. Imports of consumption goods also fell by 5.4% yoy in June (10.9% in May), mainly due to lower imports of semidurables, particularly apparel and clothing accessories.

Going forward, the unresolved trade tensions between the US and China, with possible additional tariffs to be imposed, will impact and disrupt global supply chains further, which will lead to some downside risk to global GDP growth. Malaysia’s manufacturing PMI already fell for the third month in row to 47.6 in July.

On a cumulative basis, Malaysia’s trade balance remained sizeable and amounted to RM67.1bn in Jan-June 2019, a 10.9% increase compared to the same period in 2018. However, export growth averaged -0.4% in Jan-June. We have revised lower our forecasts on growth in gross exports to 1.0% for 2019 (from an earlier projection of 2.0%), and our import growth projection lower to 1.8% for 2019 (from previously 3.4%). As for the annual trade balance projections, we expect the trade surplus to remain healthy at RM115bn in 2019 (RM120.3bn in 2018).

Source: Affin Hwang Research - 5 Aug 2019