06/10/2012 (The Star) - Malaysia's exports performance for the third quarter will drag overall growth lower as the volatility, which has become almost a permanent fixture in the global markets over the past five years, continue to cast a shadow on demand everywhere.

August exports data, released by the Statistics Department, showed that shipments of electrical and electronic products as well as crude palm oil, which together make up 42% of exports, continue to fall, reflecting the volatility.

Exports have weakened since June in tandem with neighbouring countries. Crude palm oil (CPO) benchmark prices have dropped 37.59% since April 10 to RM2,255 per tonne on Tuesday while demand for consumer electronics continues to be weighed down by the lack of demand from developed markets and a slowdown in China.

Singapore's August electronics exports contracted 11% year-on-year in August after a 2% gain in July, Indonesia's exports plunged 24.3% following a 7.6% drop in July and Thailand's exports fell 5.1% and 4.5% respectively in August and July.

In the greater East Asia region, China's exports inched up 2.7% in August after gaining 1% in July but still lower than the 3% in a median forecast, Taiwan's exports declined 4.2% in August and is expected to grow marginally in September, Japan's August exports dropped 5.8% after an 8.1% slump the previous month while South Korea's fell 1.8% in September, improving from the 6.2% fall in August and the 8.8% plunge in July.

Meanwhile, economists expect Malaysia's third-quarter gross domestic product (GDP) growth to weaken on the lower exports growth. “Third-quarter exports performance will be a big drag on economic growth,” CIMB Investment Bank Bhd economic research head Lee Heng Guie says.

He says this is partly due to the high base from last year as well as easing commodity prices and a still struggling electrical and electronics (E&E) exports front. GDP in the first half rose 5.1% but Lee expects the second half to expand 4.5% to 5% largely supported by Budget 2013 initiatives.

TA Securities Holdings Bhd economist Patricia Oh says exports will continue to show weak growth for the rest of the year and into 2013. “We're looking at full-year exports growth of 1% for 2012,” she says.

Oh says with CPO exports volume to remain weak in the coming months, much will depend on price. However, CPO prices may decline further after stabilising, Godrej International Ltd director Dorab Mistry tells Bloomberg earlier in the week.

“The outlook for the exports-reliant E&E industries remain bleak,” Oh says, noting that year-to-date to July, cumulative exports to the European Union have slumped 11.2% while to China, it has contracted 13.1%

And as individual governments struggle to find solutions to structural problems accrued over years, International Monetary Fund chief economist Olivier Blanchard warns of a protracted recovery.

In comments made to a Hungarian website, Portfolio.hu, and reported by the London-based Guardian newspaper on Wednesday, he says the eurozone crisis, debt problems in Japan and the United States and a slowdown in China meant that the world economy will not be in good shape until at least 2018.

“It's not yet a lost decade. But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape,” Blanchard says.

The JPMorgan global purchasing managers index (PMI) for manufacturing compiled by Markit shows manufacturing conditions continue to deteriorate in September. Markit chief economist Chris Williamson says in an Oct 1 report that this was led by weakness in the eurozone and a stagnation of global trade flows, which have slowed sharply compared to robust growth earlier in the year.

The index edged up to a three-month high of 48.9 in September from 48.1 the previous month, the first rise in five months and indicating that manufacturing conditions have deteriorated over the last four months, though the rate of decline eased in September.

“At the same time, as demand has deteriorated, manufacturers have been hit by rising costs, boding ill for corporate profits. A slight rise in the PMI provides some hope that the downturn may have bottomed out, though it remains too early to tell if global manufacturing has truly turned the corner,” Williamson adds.

The data shows that output and news orders sub-indices rose in September, though in both cases remained below the no-change level of 50. The orders-to-inventory ratio, often seen as a leading indicator of production, edged up to a four-month high.

“The latest available official data indicate that manufacturing output has slowed substantially since peaking at 6% in March, down to 2.3% in July. Despite the rise in September, the data suggest that growth could have dropped to zero in the third quarter,” Williamson says.

He says this reflects a deterioration in global trade flows in recent months, with the global PMI new export orders index sinking to the lowest for just over three years in July, accurately anticipating a deterioration in exports that can now been seen in the official data.

However, Williamson says the latest data does provide some hope of a steadying of global trade flows, with the index edging higher for the second month running in September, although still signalling the third-worst month in the past three years.

Hongkong and Shanghai Banking Corp Ltd's Asian economics research co-head Frederic Neumann says in a Sept 24 report that sky-high inventories in recent months may start to stabilise as production is cut back in the face of faltering demand.

While still expecting most hard data for September to show a further deceleration in manufacturing activity, he says as a gradual correction in excess inventories takes shape, this should help stabilise production and trade in the coming months. “Only in November will a convincing stabilisation set in,” Neumann says.

But much of the stabilisation still depends on the outlook in the United States and the eurozone. With stronger US growth still looking uncertain despite better-than-expected housing data and high unemployment in the eurozone, demand will not be coming back anytime soon.

“Exports outlook will be quite challenging. We expect 3% to 4% exports growth this year and 4% to 5% next year with regional PMI data still range-bound,” Lee says.

He says much depends on a turnaround for the US and eurozone economies. “The effectiveness of the third round of quantitative easing is still debatable. We'll have to wait a few months before we know but so far, growth is holding up,” Lee says.