Monday, May 25, 2009

Search for bottom may be over

Written by Ellina Badri & Melody Song
Monday, 25 May 2009 11:10

KUALA LUMPUR: The search for a bottom to the economic downturn may be over, as a slew of data, locally and abroad, appears to point to a definitive yet mild recovery in what has been dubbed as the Great Recession.

The lastest data was that of manufacturing. While still down at an accelerated pace year-on-year, the country’s manufacturing sales in March rose 6.3% month-on-month (m-o-m) to RM36.6 billion. Exports were also up during the same period, rising 10.3% to RM43.65 billion m-o-m.

“The uptrend in manufacturing sales mirrors the export numbers, indicating the sharp plunge has started to ease in line with stabilising global demand,” said RAM Rating Services Bhd chief economist Yeah Kim Leng.

“At the same time, domestic demand is being propped up by the government’s stimulus packages, while consumers and businesses here are also not credit constrained,” Yeah said, adding that a return in business and consumer confidence was being seen.

Hopeful signs such as rising global demand, boosted by synchronised economic pump-priming, and an improvement in US consumer confidence also showed that the global downturn appeared to be bottoming out, Yeah told The Edge Financial Daily.

Last week, the index of US leading economic indicators published by the US-based Conference Board, which includes components such as stock prices and consumer confidence, rose for the first time in 10 months in April. The index points to the direction of the economy over the next three to six months. According to Bloomberg reports, the Conference Board’s gauge increased 1%, the biggest gain since November 2005 after a 0.2% drop in March.

Growing Malaysian exports
According to statistics from the Ministry of International Trade, exports resumed growing in February, rising 3.39% m-o-m to RM39.6 billion, after registering consecutive declines from September to January.

“Exports moderated for the second consecutive month, registering a slower decline of 15.6% in March, after -16% year-on-year in February and -27.8% in January. Month-on-month, export performance was the most impressive in three months,” AmResearch senior economist Manokaran Mottain said in a recent report.

He said the improved March exports numbers reflected higher demand for electrical and electronic (E&E) goods, crude oil and crude palm oil.

“In particular, the improvement in exports of E&E goods was in line with the rebound in global chip sales for March, especially from US and China. All major trading partners, except Japan, posted gains in March, suggesting stabilising signs in overseas demand,” he said.

Manokaran also reckoned that the worst was over for Malaysia, although he could not rule out a turn for the worse.

RAM’s Yeah said the second quarter of 2009 would be a crucial period as it would determine if the global stabilisation was sustainable, although RAM was expecting a continuing decline in the contraction in manufacturing sales and exports.

A recovery in the West will, however, also depend on whether access to credit resumes.

In an April survey published last week by financial information services company Markit, one in 10 service sector companies in the European Union (EU), and more than three in 10 Russian companies said difficulties in raising credit was constraining their businesses.

Markit chief economist Chris Williamson had said the survey, which covered EU countries and the major emerging economies of Brazil, Russia, India and China, provided a timely reminder that bank lending remained a problem, and was likely to subdue recovery in many countries.

Meanwhile, the stress test recently completed by the Federal Reserve on the US’19 largest banks showed nine of the banks, including JPMorgan Chase & Co and Goldman Sachs Group Inc, possessed adequate capital, fuelling optimism that banks would start lending again.

RAM’s Yeah said the result of the stress test, and some indications that banks could start to return government bailout money, suggested that lending would resume, and in turn boost consumer demand and business spending.

In a comprehensive report last week, the Economist Intelligence Unit (EIU) said recent data suggested that the worst of the global economic freefall may now be ending. Notwithstanding the recent rally in global stock markets, it maintained its cautious view of global economic prospects over the forecast period.

It now forecasts global growth at purchasing power parity (PPP) to shrink by 1.8% in 2009 and rise by a relatively modest 2.1% in 2010.

It said factors weighing on global growth in the medium term included continued impaired financial intermediation in many large economies, and higher savings and reduced consumption by US households, as they adjust to lower house prices and reduced expectations of future wealth.

It revised its US forecast for 2009 to a contraction of 2.9% (from -3.2% previously) to reflect the impact of first-quarter GDP data, which showed stronger-than-expected private consumption but a deeper-than-forecast drawdown in inventories during the period.

EIU upgraded its forecast for Japan’s economic growth in 2010 to 0.8% (0.4% previously), reflecting the expected impact of a hefty forthcoming fiscal stimulus and raised its forecast for China in 2009 to 6.5% (6% previously), to reflect the strength of the macroeconomic stimulus in the first quarter of this year.

It said the euro zone outlook in 2009-10 was poor, partly reflecting a more cautious policy stance in the region than, for example, in the US. (Euro zone GDP contracted by 2.5% quarter-on-quarter in the first three months of this year.) The euro zone (and the UK) will both contract again in 2010.

2H recovery to spur rebound
With economists sighting a bottom in the slump, they are also calling for a better performance in 4Q09 from the gloomy days of 1Q.

“Given the severity, we expect a turnaround to be more gradual and positive data should only be evident sometime late 3Q or early 4Q this year. But we are more bullish now than before.

“We expect a stronger final-quarter recovery, with GDP growing at 2%, after -3.8% in 2Q09 and -2.2% in 3Q09. Consequently, we maintain our full-year GDP estimate at -2%, without any worst-case scenario,” AmResearch’s Manokaran said.

RAM’s Yeah said the recovery here would not be robust, given the synchronised downturn seen in the developed economies. “It will be a mild recovery. As long as the developed economies are languishing, we won’t go back to trend growth,” he said.

If any final analysis can be done at this point in time, an analyst said given the likelihood of a gradual global recovery, equity markets including Bursa may see limited upsides, trading range-bound with intermittent corrections, and pull back significantly if economic dynamics took a turn for the worse. For investors with staying power, long-term prospects remain bright, particularly in emerging economies.

This article appeared in The Edge Financial Daily, May 25, 2009.