Exports growth recovered in August, gaining 1.7% from 0.6% in July. More importantly it exceeded market consensus which expected a decline of 1.4% (Bloomberg). This is on account of a stronger than expected rebound following the shorter working month previously, coupled with robust demand for E&E goods. Moving forward, exports will remain at the forefront of economic growth albeit at a slower pace than the 1H14 largely due to a high base effect. Continuous global demand, spearheaded by the USA and strong momentum spilling over into the 2H14 along with sustainable growth in domestic demand, the economy is projected to grow by 6.0% in 2014. (2013: 4.7%).

- Exports in August rose by 1.7% YoY following a 0.6% gain in July, exceeding market expectations of a 1.4% decline. This is partly the result of exports resuming its uptrend following the preceding month’s extended Eid holidays. Alongside that, there was also a strong demand from the USA, Japan and parts of Europe. Considerable chunks of demand were for Electronic and Electrical (E&E) goods. On a monthly comparison, it was up by 4.5% MoM, compared to a 0.2% decline previously. The seasonally adjusted term saw exports rising by 3.8% whilst the year-to-date saw exports expanding by 9.5% compared to a 0.9% fall in the same period in 2013.

- Imports swelled by 7.6% YoY versus market polls of 0.4% and after falling by 0.7% in the previous month. Month-onmonth comparison saw a 4.4% MoM increase and the seasonally adjusted term saw a 3.3% rise. Year-to-date posted a 6.1% growth compared to 5.8% seen in the same period a year ago.

- As a result of stronger exports, trade surplus slightly widened to RM3.8b from RM3.6b. Year-to-date saw a RM52.3b surplus against RM34.5b in 2013. Total trade in August increased by 4.4% and year-to-date expanded by 7.8% compared to 2.2% in the same time frame last year.

- For the month of August, E&E exports saw a 3.7% rise in demand (33.7% share of total exports) and a 4.3% MoM increase. Demand for LNG increased by 3.8% whilst chemicals and chemical products saw an 11.2% surge in shipment. However, palm oil and its products faced a fall in demand, as did petroleum products which saw a 3.7% and 26.0% decline each.

- On shipment destination, exports to ASEAN (28% share) increased by just 1.2%, weaker than 1.7% gain seen in July. This is due to a mixed demand throughout the region. Though exports to Singapore, Thailand and the Philippines increased (7.5%, 4.8% and 35.3% respectively) this was mitigated by a fall in demand from Indonesia (-21.3%), Vietnam (-3.0%) and Brunei (-0.6%). Exports to Japan recovered, posting a 10.3% gain after contracting by 22.1% previously, as demand for LNG picked up, as did E&E products that were largely electronic integrated circuits. Exports to the EU continuously expanded, by 5.7% in August led by the Netherlands, Germany and the UK. Shipment to the USA rose by 6.3% on E&E goods, optical & scientific equipment as well as processed food. Exports to China on the other hand, contracted by 21.9%, in line with their own 6.9% increase in industrial output, slowest growth since December 2008 as its domestic economy faces some weakness surrounding policy and economic restructuring.

- As with imports, there was a 19.8% rise in demand for intermediate goods, foreshadowing better exports moving forward. Capital goods saw a 9.9% increase whilst consumption goods saw an 8.4% gain. Major intermediate goods were E&E (+8.6%, 28.7% share of imports) and chemicals & its products (+9.2%)

Outlook

- Though we expect exports to remain one of the major drivers of the economy on account of a high base effect as well as some global weakness, the 3Q14 GDP growth is estimated to taper off to 5.8% from 6.4% in the 2Q14, leading to a slower growth in the 2H14. However, momentum strength from the 1H14 as well as ongoing recovery in the USA, parts of Europe and possibly China and Japan, boosted by year-end festivities, would help mitigate the downside effects. Along with sustainable growth in domestic demand it would be the basis of our GDP growth forecast of 6.0% for the whole of 2014 compared to 4.7% in 2013.

Source: Kenanga