Export growth was surprisingly slower in July, gaining just 0.6% YoY, well below market expectations for a 5.3% increase. We reckon that this is partly due to the shorter working month on extended closures during the Eid holidays. In addition to that, base effect is starting to wear off, making exports for the 2H14 harder to keep pace with the 1H14. Nonetheless, exports will continue to spearhead the economy in the coming months on continual demand from the USA and parts of Asia, albeit at a slightly slower pace. Momentum from the 1H14 is expected to spill into the 2H14, boosting overall GDP growth to 6.0% for the whole of 2014 (2013: 4.7%).

- Exports in July increased by just 0.6% YoY, considerably slower than June’s pace of 7.9%. It is also below consensus’ mean of 5.3%. This is due to a shorter working month on account of extended closures during the Eid period. Furthermore, the base effect appears to be wearing off as seen on the monthly comparison, which showed that exports growth contracted at a smaller pace of -0.2% MoM, compared to -5.5% previously, yet managing only a meager annual growth. For a more accurate gauge, the seasonally adjusted term saw exports rising by just 0.4%. Year-to-date saw that exports expanded by 10.7% compared to a 2.8% decline in the same period in 2013.

- Imports also disappointed, falling by 0.7% YoY versus market poll of 5.5%. It had gained 8.9% in June. Monthon-month comparison on the other hand saw imports expanding by 0.6% MoM after falling by 3.5% previously. The seasonally adjusted term saw a 3.3% increase. Yearto-date posted a 5.8% increase compared to 4.7% seen in the same period a year ago.

- Due to weaker exports, trade surplus narrowed to RM3.6b from RM4.1b, the smallest surplus since July 2013. Year-to-date saw an RM48.5b surplus against RM27.4b in 2013. Total trade in July saw no annual growth but year-to-date expanded 8.4% compared to 0.7% in the same period last year.

- In the month of July, E&E exports fell by 0.1% YoY (33.7% share of total exports) but saw a 1.1% MoM increase. Petroleum products (9.6% share) however surged 35.9% YoY due to a rise in volume (+39.9%), which managed to make up for the fall in average unit value (-2.8%). Crude petroleum exports also rose sharply, by 26.2% on higher volume (+19.1%) and average unit value (+6.0%). Exports of palm oil and its products (9.2% share) increased by 8.9% whilst the exports of LNG (6.6% share) sharply dropped by 22.9% due to a sharp fall in its volume of shipment (-25.9%) though average unit value rose (+4.1%).

- On shipment destination, exports to ASEAN (29.1% share) increased by 1.7%, led by strong demand from Singapore, of which goods shipped up by 16.6% (17.4% MoM). However, exports to China fell by 14.4% due to lower shipment of both manufactured goods as well as commodities. However, there was a 9.3% MoM rise in exports on a monthly comparison. Exports to Japan also declined, posting a -22.1% (-13.1% MoM) due to lesser demand for LNG, as the government stepped up energy-saving campaigns during the summer months. However, demand for E&E remains a positive 7.7%. Shipment to the EU continues to expand, at an 8.9% (9.0% MoM) pace in July, on higher demand for palm oil and E&E goods. With the exception of France, all major European countries saw a rise in exports. Shipment to the USA grew by 4.5% but saw a 3.7% MoM contraction. Annual expansion is on account of stronger exports of E&E, optical & scientific equipment and chemicals.

- Moving on to imports, there was a 17.9% fall in demand for capital goods (7.3% share of imports), due to a decrease in all main components (transport equipment, industrial and capital). Consumption goods (7.3% share) imports also saw a decline, contracting 9.0% YoY. Intermediate goods (60.2% share) however, saw a 2.6% YoY growth in July, primarily still backed by better global E&E demand.

Outlook

- Despite the weak exports in July, we stand our ground that exports will continue to spearhead the economy. However, it’s less likely that the 3Q14 exports growth will be able to supersede the pace that was seen previously (2Q14: 14.2% YoY) on account of a higher base effect and to a certain degree moderating global demand. Hence, the 3Q14 GDP growth is expected to taper off to 5.8% from 6.4% in the 2Q14. This would mean slower growth trajectory in the 2H14. However, due to the better than expected growth in the 1H14 along with continued economic growth in the USA as well as a more positive outlook in Japan as well as China in the latter part of the year, we forecast a better GDP growth of 6.0% for the whole of 2014 compared to 4.7% recorded in 2013.

Source: Kenanga