PP 7767/09/2010(025354)

Malaysia
Economic Highlights
ïMARKET DATELINE

9 September 2010

Industrial Production Slowed Down Markedly In July,

Pointing To Further Deceleration In Economic Growth
In The 3Q

◆ Industrial production slowed down markedly to 3.2% yoy in July, from +9.3% in June and +12.3% in May.
This was the slowest pace of growth in eight months, suggesting that industrial activities have slowed down, on
the back of a weaker growth in exports. The slowdown was reflected in slower increases in manufacturing
production and electricity output. These were made worse by a decline in mining output during the month.

◆ The sharp slowdown in industrial and manufacturing production in July indicates that industrial activities have eased
further in the 3Q. As a result, we expect real GDP growth to slow down to 5.6% yoy in the 3Q, from +8.9%
in the 2Q.

◆ Going forward, the global economy is likely to slow down in 2H 2010 and in 2011, as worldwide stimulus
spending dissipates and austerity measures in some European countries to address fiscal deficit and debt problems
begin to bite. This will likely be compounded by the policy normalisation and tightening measures introduced in some
countries, particularly in Asia, that will likely slow down economic activities in these countries. As a whole, we expect
the country’s real exports to slow down in 2H 2010, after a strong pick-up in the 1H.

◆ We envisage domestic demand to ease to 4.0% yoy in 2H 2010, from +7.2% in the 1H. This will likely be
reflected in a more moderate increase in consumer and public spending, while private investment will likely sustain
its increase. As a whole, we expect real GDP growth to slow down to 5.0% yoy in 2H 2010, from +9.5%
in the 1H. For the full-year, real GDP will likely expand by 7.3% in 2010, before easing to +5.0% in 2011 and
compared with -1.7% in 2009.

Industrial production slowed down markedly to 3.2% yoy in July, from +9.3% in June and +12.3% in May (see
Table 1). This was the slowest pace of growth in eight months, suggesting that industrial activities have slowed down, on
the back of a weaker growth in exports. The slowdown was reflected in slower increases in manufacturing production
and electricity output, which slackened to 7.2% and 4.4% yoy respectively in July, from the corresponding rates of
+13.1% and +5.2% in June. These were made worse by a decline in mining output, which slipped into a contraction of
5.9% yoy in July, from +1.3% in June. Indeed, the increase in manufacturing production was the slowest pace in five
months, in tandem with a slowdown in the exports of manufactured goods, which has been trending lower in the last four
consecutive months to 10.8% yoy in July. The slowdown in manufacturing production was mainly on account of a slower
increase in the production of electronic & electrical products, which eased to 7.6% yoy in July, from +21.9% in June. This
was made worse by weaker production of wood & wood products, paper & paper products, chemical & chemical products
and basic metal & fabricated metal products as well as a decline in the production of refined petroleum products and textiles
& footwear. Stripping out seasonal factors, industrial production grew at a slower pace of 8.2% yoy in July, compared with
+10.8% in June and +12.4% in May, indicating that industrial activities are weakening.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 9 September 2010
Mom, industrial production rebounded to increase by 1.7% Table 1 Industrial Production Index
in July, from -2.9% in June (see Table 2). The pick-up was (2005 = 100)
broad-based, from the manufacturing to electricity and
Total Mfg Electricity Mining
mining sectors. Manufacturing production and electricity
output grew by 1.5% and 2.7% mom respectively in July, (% yoy)
compared with the corresponding rates of -1.5% and -5.6%
in June. Similarly, mining production bounced back to 2008 0.7 0.6 1.2 0.8
increase by 2.1% mom in July, from -5.8% in June. 2009 -7.7 -10.0 0.8 -4.3

2009 Q 3 -7.0 -9.1 3.2 -4.2

The sharp slowdown in industrial and manufacturing
Q4 2.5 4.4 10.3 -3.4
production in July indicates that industrial activities
have eased further in the 3Q. As a result, we expect 2010 Q1 11.0 15.3 18.8 0.8

real GDP growth to slow down to 5.6% yoy in the 3Q, Q2 10.7 15.5 9.6 0.6

from +8.9% in the 2Q.

2010 May 12.3 18.4 11.5 -0.2
Jun 9.3 13.1 5.2 1.3
Going forward, we envisage the global economy to slow
July 3.2 7.2 4.4 -5.9
down in 2H 2010 and in 2011, as worldwide stimulus
spending dissipates and austerity measures in some European 2009 (Jan-July) -12.0 -16.0 -3.7 -4.3
countries to address fiscal deficit and debt problems begin 2010 (Jan-July) 9.7 14.1 12.4 -0.3
to bite. This will likely be compounded by the policy
normalisation and tightening measures introduced in some
countries, particularly in Asia. As it stands, signs of a slowdown in the global economy are becoming more apparent.
Indeed, global manufacturing activities softened for the fourth consecutive month in August, the slowest pace of increase
in nine months, while global services activities expanded at the slowest pace in six months during the month. In the
same vein, the OECD composite leading indicator’s 12-month rate of change is likely to have peaked in March, after
moderating for three straight months to 6.7% in June and from +8.3% in May, pointing to slowing OECD economies in the
months ahead.

Despite the weakness, we do not expect the global economy to fall into a double dip even though there is a risk
of a sharper-than-expected slowdown, given that policy normalisation and tightening remain gradual. Furthermore,
the US Fed has shifted its policy towards a loosening bias on its quantitative easing, prompted by weakness in incoming
economic data. In addition, the sovereign debt problems in Euroland will likely be manageable, following the announcement
of an emergency stabilisation loan of €750bn and the €110bn rescue package for Greece. Still, the austerity drives in
Europe will likely affect its demand for Malaysia’s exports given that 10.7% of the country’s exports went straight to
Europe. There would be indirect impact as well since 12.7% of Malaysia’s exports go to China, and Europe is China’s
largest export market (accounting for 19.7% of its total exports). Besides, the ringgit has appreciated by 9.9% year-to-
date, one of the sharpest in the region. As a whole, we expect the country’s real exports to slow down to 6.9% yoy
in 2H 2010, from +16.5% in the 1H, bringing the full-year growth to +11.7% compared with -10.4% in 2009.

In the US, the economy grew at a weaker-than-expected annualised rate of 1.6% in the 2Q. Growth is expected to remain
soft in the 2H of the year given that consumer spending is slowing down and housing sector experiencing a renewed
weakness. However, the m-o-m increase in real PCE for
the third month out of four months in July suggests that
Table 2 Industrial & Manufacturing consumer spending is likely to remain resilient in the
Production months ahead in supporting the US economy. Similarly,
manufacturing activities slowed down for the last three
% mom
consecutive months, but its rebound in August suggests
Total Total Electricity Mining that the sector will likely be resilient as well. Although
IPI Mfg the housing sector experienced a sharp drop in sales in
2010 May 3.2 3.5 3.3 2.4 recent months, it was made worse by the end of the
Jun -2.9 -1.5 -5.6 -5.8 government’s tax incentive in April. As a whole, the US
July 1.7 1.5 2.7 2.1 economy is projected to grow at a more moderate
pace of 2.6% in 2H 2010, compared with +3.1% in the
(3-month moving average)
first half, bringing the full-year growth to around +3.0%,
% mom % yoy a rebound from -2.4% in 2009.

Total Total Elec- Total Total Elec-

Similarly, the austerity drives will likely hurt some of the
IPI Mfg tricity IPI Mfg tricity
countries in the Euroland. Nonetheless, Germany, which
2010 May 4.4 4.9 5.4 May 12.4 18.0 15.9 has gained competitiveness on the back of a weaker euro,
Jun -1.2 -0.6 -1.5 Jun 10.8 15.5 9.6
would provide some cushion. This suggests that the
Euroland economy will likely expand at a more moderate
July 0.6 1.2 0.1 July 8.2 12.8 7.0
pace in the months ahead but will likely be resilient. In

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 9 September 2010
the same vein, the Japanese economy will likely slow down in the 2H of the year, on the back of a slowdown in global
demand for the country’s exports.

In China, retail sales moderated for the second consecutive month in July and fixed-asset investment in urban areas
slowed down to 24.9% yoy in January-July, from the corresponding period of +32.9% in 2009. Similarly, industrial production
headed south for the fourth straight month in July, while growth of money supply has been easing since December last year.
Although the PMI manufacturing index rebounded in August, manufacturing activities remained weak. As a whole, China’s
economy is likely to slow down further in the 2H of the year, after recording a more moderate growth of +10.3% yoy
in the 2Q.

Meanwhile, demand for E&E products, which accounts for about 45% of Malaysia’s total exports in 2009, will likely be
softer in the 2H of the year, in line with a slowdown in global economic activities. As it stands, worldwide semiconductor
sales eased to 37.0% yoy in July, from +42.6% in June and after reaching a high of +59.9% in March. This suggests that
a sharp rebound in sales due to a spike up in demand and inventory rebuilding are normalising.

A softer export growth will likely translate into slower increases in jobs and production, which will likely affect consumer
spending and business investment as well. As a result, we envisage domestic demand to ease to 4.0% yoy in 2H
2010, from +7.2% in the 1H, bringing the full-year growth to 5.6% in 2010, a rebound from -0.5% in 2009. This will likely
be reflected in a more moderate increase in consumer spending, which is projected to grow at a slower pace of 4.7%
yoy in the 2H versus +6.5% in the 1H. Already, consumer spending is showing signs of weakness as reflected in a
moderation in new car sales, the imports of consumption goods and service tax collection in the 2Q. Consumer spending,
however, will likely be resilient on the back of high savings and rising consumerism. For the full-year, consumer spending,
however, will likely bounce back to +5.6% in 2010, from +0.7% in 2009.

Although businesses will likely turn cautious when excess production capacity builds up, the private investment is
projected to sustain its expansion in the 2H of the year, due partly to a low base effect. Public investment, however, is
projected to expand at a slower pace in the 2H of the year, as the government stimulus fizzles out. Consequently, we
expect fixed capital formation to expand by 10.0% yoy in 2H 2010, compared with +9.4% in the 1H, bringing the full-
year growth to 9.7% during the year, compared with -5.6% in 2009. Public consumption, on the other hand, will likely
contract by in the 2H of the year, on the back of a fiscal consolidation. As a whole, we expect real GDP growth to slow
down to 5.0% yoy in 2H 2010, from +9.5% in the 1H. For the full-year, real GDP will likely expand by 7.3% in 2010,
before easing to +5.0% in 2011 and compared with -1.7% in 2009.

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