No Malaise in Malaysia
Growth was broad based across all sectors. The key contributor to the strong GDP performance was the strengthening in growth of the manufacturing and services sectors. Growth in the manufacturing sector strengthened to 12.5 per cent, contributing 3.8 percentage points to GDP. The expansion was supported by stronger growth in export-oriented industries and sustained growth in domestic-oriented industries. The growth reflected stronger external demand, in particular for electronics, and the improving domestic demand and continued recovery in the investment cycle. In the export-oriented industries, higher output growth was recorded in the electronics, rubber and chemical products industries. Strong growth in the semiconductor industry stemmed from higher corporate spending on information technology products and rising global consumer expenditure in the wireless product segment.
In the domestic-oriented industries, growth was supported mainly by the fabricated metal, food and iron and steel products industries.
On the demand side, private consumption remained robust, underpinned by the rise in disposable income, improvement in business conditions, low interest rates and stable labour market conditions.
Importantly, the growth momentum has been sustained by a stronger expansion in private sector capital spending, since the turnaround in investment activity in the third quarter of 2003. Investment in machinery and equipment and capacity expansion strengthened as business sentiment improved further while capacity utilisation remained high. Sustained inflows of FDI, higher reinvestment amid improving business conditions and the rapid growth in capital goods imports indicate that the underlying trend in private investment recovery is becoming entrenched.
Despite the strengthening of domestic demand, inflation continued to remain low at 1 per cent. Adequate supply and the competitive business environment contributed to containing inflationary pressures.
In the external sector, the trade surplus narrowed from 19.9bn in the fourth quarter of 2003 to 18.6bn, with the stronger increase in imports. While gross exports expanded by 16.6 per cent, gross imports increased at a stronger pace of 23.4 per cent. The growth in exports was due to stronger growth in exports of manufactured goods and sustained expansion in exports of agriculture commodities while receipts from minerals grew at a more moderate pace. Higher manufactured exports were spurred largely by the upturn in the electronics cycle. High prices as well as increased export volume of palm oil, rubber, sawn timber, LNG and crude oil contributed to the strong growth of commodity earnings.
Strong domestic demand, rising production, accumulation of stocks of intermediate goods on expectations of sustained export growth and stronger investment activities induced significantly higher imports. In line with the pick up in electronics exports, imports of intermediate goods, which are inputs for manufactured exports, recorded strong growth. After several quarters of low imports, capital goods imports were substantially higher in the first quarter of 2004, reflecting investment in machinery and equipment and capacity expansion in the manufacturing, services and oil and gas industries. With strong private consumer spending, imports of consumption goods also increased significantly.
The ringgit exchange rate continues to facilitate increasing trade and investment flows and is supported by rising international reserves, low external debt, low inflation and a sound banking sector. The ringgit continues to remain at fair value.
Monetary conditions in the first quarter of 2004 continued to support the stronger expansion in private sector activities. Interest rates during the quarter remained low and stable, reflecting the low borrowing costs and sustained demand for loan financing. The growth in loans disbursed by the banking system was sustained at a high annual rate of 14.4 per cent.
In line with the higher growth in private sector-led economic activities and the improved external sector, all three monetary aggregates expanded during the quarter. The annual growth rates of M1, M2 and M3 were higher at 19.8 per cent, 12.6 per cent and 10.7 per cent respectively at end-March 2004 (14.6 per cent, 11.1 per cent and 9.7 per cent respectively at end-December 2003). The higher growth in M1 reflected stronger demand for transactional balances due to higher consumption spending as well as higher turnover in the equity market. Meanwhile, broad money, M3, expanded by RM19.1bn, reflecting the expansionary external operations and the higher financing by the banking system to the private sector.
The prospects for higher growth in 2004 have strengthened considerably, with favourable developments in the global economy, reinforced by a strong domestic economy. Expansion in the US economy has been stronger than expected and prospects remain favourable, in particular the pick up in investment and employment creation. The sustainability of the recovery in the US appears to be more entrenched. Current indicators point to robust growth and sustainability in economic expansion in Japan, while continued expansion in consumption and investment are expected to support growth in the euro area. Growth for the regional economies has been revised upwards, amid robust intraregional trade following the strong upturn in global electronics and stronger expansion in aggregate domestic demand. Growth in the People’s Republic of China (PR China) will remain strong with rising sales and higher FDI inflows. The region as a whole will continue to benefit from greater integration and rising intra-regional trade, which have mutually reinforced the stronger momentum and growth process in Asia.
More recently, some emerging concerns centre on overheating and the impending slowdown in PR China, rising energy prices and market expectations of rapid increase in interest rates. While these concerns warrant close monitoring, the balance of risks on the sustainability of growth continues to favour economic expansion. As PR China has introduced several measures to mitigate overheating in selected regions and industries, growth is expected to remain strong. In addition, the impact of higher energy prices is expected to be mitigated by continuing efficiency gains in energy utilisation, while the restructuring that has been undertaken in the banking and corporate sectors, globally and within the region in the recent decade, has raised the capacity of Asian economies to absorb shocks and accorded greater flexibility in managing financial risks.
The favourable but more challenging external environment is expected to continue to reinforce strong domestic demand growth in Malaysia. Greater consumer and business confidence and favourable commodity prices are expected to reinforce the strong momentum of growth in private consumption while the recovery in private investment will become more deeply entrenched. The public sector will, however, continue to consolidate and major indicators point to sustained favourable growth.
The outlook for private investment shows a firming uptrend. Improved corporate profitability and cash flow positions and high capacity utilisation rates, would drive and sustain growth in private investment. The improved business sentiment as reflected in the MIER Business Conditions Index, which rose 2.1 points due to rising sales, higher exports and local orders as well as higher loans disbursed to businesses and imports of capital goods, indicate an expansion of business activities going forward. The strong six-month smoothed growth of the Leading Index, also indicates that prospects for the Malaysian economy will remain favourable into the third quarter.
Domestic prices are expected to remain subdued. While capacity utilisation has increased considerably in some sub-sectors, new private investment is raising capacity. Of significance, productivity increases have outpaced the rise in labour costs across the Malaysian economy.
Given the robust domestic economic conditions amid benign inflationary pressures, interest rates in Malaysia will remain low for some time to come.