Exports in June expanded by 7.9%, significantly below market expectations for a 15.0% rise. This is due to the stronger than predicted month-on-month decline in demand from China, the USA and Japan. Nonetheless, we do expect the annual growth of exports to remain relatively strong throughout the year, spearheaded by continuous economic improvement from the USA and parts of Asia. However, growth may be on slightly tapered gradient as a result of a higher base effect and modest recovery from other parts of the world. We continue to expect exports to be the main driver of GDP growth in 2014 which is projected to expand by 5.5% from 4.7% last year.

Exports in June increased by 7.9% YoY, a significantly slower pace from the May’s 16.2% expansion and far below market expectations for a 15.0% rise. This is due to the stronger than expected month-on-month decline, which fell by 5.5%, due to a fall in demand from the USA, China and Japan. On seasonally adjusted terms, exports contracted by 4.5%. Nevertheless, for the whole of 2Q14, exports expanded by 14.2% YoY (1Q14: 10.8%), the strongest annual quarterly rise since 2Q10. Compared to the previous quarter, it increased by 2.4% QoQ. For the 1H14, it increased by 12.5% (1H13: -4.0%), which provides strong momentum to help mitigate any fallbacks in the 2H14.

Imports also performed below expectations, increasing by just 9.3% against consensus’ estimates for a 12.9% growth. On a monthly comparison, imports fell by 3.2% whilst the seasonally adjusted term saw a 4.5% decline. For the 2Q14, imports rose by 8.6% YoY (1Q14: 5.5%) and by 7.7% compared to the previous quarter. 1H14 saw imports rising by 7.1%, compared to 4.4% seen in the 1H13.

As a result of weaker than expected exports, trade surplus narrowed to RM4.0b from RM5.7b. For the 2Q14 trade surplus also narrowed, to RM18.4b from RM26.3 in the 1Q14. However, trade surplus nearly double to RM44.7b from RM24.6b in the 1H13. Total trade in June increased by 8.5% from 14.1% in May, 11.5% in the 2Q14 (1Q14: 8.3%) and by 9.9% for the 1H14 (1H13: -0.1%).

For the month of June, exports saw a 5.5% YoY increase in demand for E&E goods (33.3% share of total exports) and a 24.5% rise in crude petroleum exports (5.1% share), as a result of a 12.5% rise in volume and 10.7% increase in average unit value. Petroleum products exports (7.2% share) increased by 11.5% on increased volume (+3.0%) and average unit value (+8.3%). LNG exports (8.5% share) rose by 11.2%, on 6.7% rise in volume and 4.2% rise in average unit value whilst exports of palm oil and its products increased by 4.6%.

On shipment destination, exports to ASEAN (28.3% share) increased by 9.6%, largely on strong demand for commodity based products. Exports to the Middle Kingdom however, fell by 1.9% as a result of lesser demand for chemicals and its products and petroleum products, though it still saw a positive rise in E&E goods demand. Exports to Japan fell by 2.6% on lesser demand for LNG, probably a result of lower energy needs during the summer months. However, exports of E&E goods to Japan increased by 9.5%. Shipment to the EU recorded a growth of 3.9%, the slowest annual expansion seen since June 2010 (-1.8%), evidence of deflationary threat that’s plaguing the region. In detail, there was a 4.6% increase in demand from the Netherlands and 10.9% increase from the UK. However, there was a 7.1% contraction in demand from Germany, which falls in line with Germany’s own 3.2% decrease in industrial orders as orders from the Eurozone fell by 10.4%. Exports to the USA on the other hand increased by 9.5%, on high demand for optical & scientific equipment and E&E goods.

Imports on the other hand, saw a 15.1% rise in demand for capital goods (15.3% share of total imports), on account of increased need for transport equipment, industrial and capital goods. Intermediate goods imports (58.9% share) increased by 2.7% whilst consumption goods imports (7.4% share) increased by 7.6%, mainly on goods for household consumption, no doubt in preparation for the Ramadhan and Eid celebrations.

Outlook

Though exports was below expectation in June, we continue to remain optimist moving forward. Strong 2Q14 exports backs our 2Q14 GDP estimates of 5.7%. Strong momentum will aid to mitigate any downside effects in the 2H14, mainly on a high base effect and possible slide in the Eurozone. However, the US economy remains steady and Japan and China’s outlook remains positive for the tail –end of 2014. This allows us to keep to our GDP target of 5.5% for 2014.

Source: Kenanga