15/08/2022 (The Star Online) - EXPORTS expanded strongly in June, growing by 38.8% year-on-year (y-o-y), but palm oil exports could face stiffer competition from Indonesia and oil and gas shipments could moderate on softening energy prices.

While exports are buoyed by a weak ringgit, the momentum may cool on slowing global growth as a US recession may set in. With the US Federal Reserve (Fed) cutting interest rates, the dollar will weaken and the stronger ringgit may no longer be a boost to our exports.

Shipments of palm oil, which contributed 6.5% to total exports, may drop as Indonesia recently reduced its export levy for crude palm oil (CPO) to zero from US$200 (RM889) per tonne.

As a result of its three-week ban on palm oil exports in May, Indonesia may take three months to lower its high palm oil inventory, and Malaysian palm oil exports could dip until this month.

Exports of electronic and electrical (E&E) products in June were still among the highest; shipments may start to drop in the quarters ahead as global semiconductor sales are pointing at lower growth, said CGS-CIMB Research in an economic update.

Pricing in slower export growth of about 10% in the second half of 2022 (after a 26% growth in the first half), growth in exports for 2022 is forecast at 18%.

For 2023, export growth may moderate to 7.5% on slowing global growth to 3% this year and 2.4% next year (6.1% in 2021).

A lower average selling price (ASP) per tonne for CPO is expected – RM3,400 next year versus RM5,000 this year (seven months in 2022: RM6,005), said Maybank Investment Bank chief economist Suhaimi Illias.

But the ASP for crude oil is still expected at US$100 (RM444) per barrel this and next year; forecasts are with a downside risk bias, added Suhaimi.

Export growth is expected to be robust but in view of global factors such as war in Ukraine and US rate hikes, it may moderate towards the end of the second half of 2022, said Employees Provident Fund head of economics and research Dr Afzanizam Mohamed Rashid.

While the weak ringgit has helped to boost our competitiveness, the sharp rise in the US fed funds rate is likely to take a toll on the US economy as higher borrowing costs curtail US domestic demand.

Global supply disruptions also affect turnaround time and the productivity of our economy which is highly integrated with the outside world.

US inflation eased in July to 8.5% from a red-hot 9.1% in June, but the Fed needs to see several months of declines in the inflation rate before it stops raising rates.

US inflation may stabilise at elevated levels, as commodity prices have corrected.

Additionally, the US housing sector has slowed down and consumer confidence also decreased, said Nomura Asset Management.

With a US recession and weakening of the dollar, the exchange rate boost to our exports may come to an end and this will coincide with a weakening of external demand, said former Inter-Pacific Securities head of research Pong Teng Siew.

A formal definition of recession is a broad-based drop in sales, income, employment and production across the economy.

With many people dropping out of the labour force as a result of Covid-19, the official US unemployment rate has, in fact, dropped; the US household survey showed the total number of people in employment has also fallen.

US payrolls, however, rose as inflation forced many people to work in two jobs, while the US Composite Purchasing Managers Index data has already shown a contraction, suggesting that production is down.Weekly US unemployment claims are at an eight-month high; nominal incomes are up but real income is down after being adjusted for inflation.

While nominal sales figures are obfuscated by inflation, in my opinion, a recession has indeed begun in the United States, said Pong.

Has the recent jump in job numbers to 528,000 for July put recession fears on the back burner?

The market has jumped the gun in thinking so, said Pong, as the non-farm payrolls data will get restated after year-end numbers.

For example, in 2007, US employment data showed a healthy growth in employment data all the way in that year.

Upon entering 2008, the 2007 non-farm payrolls numbers were revised sharply lower and showed job losses instead.

Such lags in statistical data are a major cause of the National Bureau of Economic Research issuing recession calls long after recessions actually begin.

US weekly unemployment claims data has already begun showing uninterrupted rises for nearly two months; something is clearly amiss in the US labour markets, said Pong.

Export numbers in Malaysia are likely to ease in the fourth quarter of 2022, as commodity prices drop; CPO prices are down but there is a lag effect of actual prices.

Semi-finished goods will also see demand ease with exports pared down towards year-end, said Etiqa Insurance and Takaful chief strategy officer Chris Eng.

Despite talk of slowing global trade, there is still demand for certain goods especially E&E products. Producers and factories are still busy with their orders; when the labour shortage issue is addressed, this sector is likely to perform until next year, said Areca Capital CEO Danny Wong.

As a regional trade outperformer and trade-dependent economy, Malaysia is also facing mounting trade headwinds.

One silver lining is that Malaysia has topped the region in attracting foreign direct investment, adding capacity in a wide range of manufacturing sectors, said HSBC Asean economist Yun Liu.

The exchange rate will be closely monitored to see its impact on export growth in ringgit terms. The next few months of US inflation data will be crucial in the Fed’s rate hiking or reduction path, which will affect the value of the ringgit.Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.

https://www.thestar.com.my/business/business-news/2022/08/15/can-robust-exports-be-sustained