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Malaysia’s second-quarter economic growth somewhat surprised many.

Save for economists who have looked at leading indicators during the period, laymen might not have foreseen the rebound in economic activity during the quarter. Hence, the 4.9% expansion that topped the preceding quarter’s 4.5% growth came as a surprise.

Where did the growth come from? This is what the talk on the street has been lately. People are trying hard to determine the sources of growth in the last few months. Also surprising was the fact that Malaysia’s economic performance bucked regional trends. Singapore’s gross domestic product (GDP) growth, for instance, cooled to almost 0% in the second quarter from 1.1% in the preceding three months. Even Indonesia – a resilient economy due to its huge population – recorded a marginally slower growth of 5% from 5.1% in the first quarter.

The question among laymen, then, was: if both business and consumer sentiments remained as subdued as commonly believed, then how was it possible for the economy to post a stronger expansion last quarter? After all, those who looked at business condition reports from the Malaysian Institute of Economic Research (MIER) must have noted the marginal decline in its index from the first quarter. More importantly, it remained below the important threshold of 100 points, indicating the dominance of pessimistic views. Last year, the index averaged circa 105 points, indicating stronger confidence among businesses. Similarly, global information provider IHS Markit reported that Malaysia’s manufacturing Purchasing Managers’ Index (PMI), a gauge of the manufacturing sector’s performance, remained below the 50-point demarcation in June this year.

A more optimistic scenario, however, was painted by Malaysia’s Department of Statistics in its quarterly Business Tendency Statistics report. The report’s overall business confidence indicator rebounded by about 3% in the second quarter after contracting in the earlier three months. Of greater interest was that approximately 14% of the business establishments surveyed foresaw a more favourable business outlook in the following six months. That was the highest positive reading since the first half of 2018. The report also showed that the positive outlook in the second quarter was supported by the strong confidence of establishments in the services sector, which recorded a net positive balance of over 30%. A further breakdown showed the finance sub-sector posting the largest increase in the net positive balance.

Scrutinising the GDP statistics further reveals that consumers provided the strongest support to the economy. In general, Malaysian consumers have remained upbeat. This is evidenced by the fact that about 90% of the headline GDP growth for the period was due to a surge in consumer spending.

The next question, then, is: what induced consumers to keep spending, and are they likely to tighten their belts in the near future? After all, we so often joke about consumers spending time in shopping malls just to get away from Malaysia’s hot weather, and not really to buy things.

Interestingly, labour market statistics indicate that the current situation is not as bad as it was in 2016. If we look beyond Malaysia’s unemployment rate (the number of unemployed workers as a ratio of the labour force), which seems quite stable in the past few years, we will notice that other statistics also appear to be more favourable than, say, three years ago. For instance, on a year-on-year basis, the number of unemployed workers only climbed by an average of 2% in the first half of 2019. On the contrary, in the first half of 2016, when plunging global crude oil prices dragged Malaysia’s economic growth down to nearly 4%, the average year-on-year increase in the number of jobless people was higher at 13%. During the year, the unemployment rate, climbed to 3.4% from 3.1% in the preceding year.

Similarly, statistics on the number of active jobseekers show that the labour market remains quite resilient. As at end-June 2019, total active jobseekers stood at circa 238,000 compared with end-September 2016’s approximately 310,000 (this was when the economy was affected by plunging global crude oil prices).

Other consumer confidence surveys also depicted a rather positive trend. A case in point is the Conference Board’s Global Confidence Survey (a collaboration with Nielsen) ranking Malaysia at 10th place in the second quarter this year. This is despite a marginal decline from the preceding three-month period. According to the breakdown, Malaysians’ willingness to spend has not changed over the period, although their perceptions of job prospects and personal finances had deteriorated slightly. Even MIER’s Consumer Sentiment Index showed a rebound in the second quarter.

What would the prospects be like in the near term? Firstly, we must bear in mind that consumers’ contribution to the overall growth had been above its historical norm in recent quarters. For instance, in the past five years, consumer spending growth contributed about 67% to the overall expansion of the economy. Hence, the spike in its contribution to 90% of growth in the recent quarter might not be sustainable. Although a pronounced drop in spending is unlikely to happen, a slight moderation should be expected.

Secondly, it is worth noting that with rapidly changing business models, more and more people and establishments are involved in online businesses. For instance, it was estimated that the market for food delivery in Southeast Asia had grown by more than 100% in the past two years to roughly USD5 billion. As such, while the outlook for traditional businesses appear to be bumpy, the prospects for online businesses are indeed positive. This helps to sustain their spending power.

 

This article was first published in The Edge Malaysia Weekly dated September 2, 2019 – September 8, 2019.