PP 7767/09/2010(025354)

Malaysia
Economic Highlights

MARKET DATELINE

21 June 2010

Leading Index Slowed Down In April, Pointing To A

More Moderate Economic Growth In 2H 2010

The Leading Index, which provides an early signal of the direction that the economy is heading, fell by 2.7% mom
in April, compared with +3.7% in March. This was the fourth decline in five months due to declines in industrial
material price index (-0.7%), the number of new companies registered (-0.6%), the number of housing permits
approved (-0.5%), the ratio of price to unit labour cost in the manufacturing sector (-0.4%), trade with eight major
trading partners (-0.4%), money supply (-0.2%) and CPI for services (-0.1%; inverted) as well as a slowdown in
the Bursa Malaysia Industrial index (+0.1%). The broad-based drop in economic indicators caused the leading
indexs six-month smoothed growth rate to slow down sharply to 3.9% in April, from +11.2% in March
(see Chart 1). This was the slowest increase in about a year, signalling that the economy will likely grow at
a more moderate pace in 2H 2010.

Similarly, the Coincident Index (CI), which is used to monitor the most recent state of the economy, fell by 0.2%
mom in April, compared with +1.4% in March. This was attributed to declines in industrial production index (-0.2%),
gross imports (-0.2%) and salaries & wages in the manufacturing sector (-0.1%). These were made worse by
weakening manufacturing sales and contributions to the EPF. These were, however, mitigated by a pick-up in
employment in the manufacturing sector (+0.2%) during the month. On a six-month smoothed rate basis, the
CI index moderated somewhat to 7.4% in April, from +9.0% in March. This was the first easing after three
consecutive months of picking up, suggesting that real GDP growth will likely expand at a more moderate
pace in the 2Q, after growing at the fastest pace of 10.1% in a decade in 1Q 2010.

The Lagging Index (Lag), which serves to confirm what had happened to the economy, however, rebounded to
increase by 3.2% mom in April, from -2.3% in March. This was due to a pick-up in lending to the private sector
(+3.1%). This was, however, offset partially by a decline in the number of new vehicles registered (-0.3%) and a
slowdown in the number of EPF contribution defaulters (inverted). The number of investment projects approved, on
the other hand, remained stable during the month. As a result, the six-month smoothed growth rate of the lagging
index rebounded to 21.0% in April, from +16.3% in March but off the peak of +24.2% in February, pointing to a
moderation in GDP growth in the 2Q.

Chart 1
Leading Index

Index Growth rate*

20
160
140 15
120
100 10
80
5
60
40
0
20
0 -5
00 01 02 03 04 05 06 07 08 09 10

L e a d i n g In d e x ( L H S ) Y / Y (R H S )

* Growth rates are expressed as compound annual rates based on the ratio of the current months
index to the average index during the preceeding 12 month
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 21 June 2010

Overall, the slowdown in both the leading and coincident indices six-month smoothed rate of change suggests that
the countrys economic activities will likely expand at a more moderate pace in 2H 2010. As it stands,
global manufacturing activities moderated in May, the first easing in three months, while global services activities
slackened during the month, the first moderation in four months. Similarly, the OECD composite leading indicator,
has been trending lower m-o-m for the last few months before stabilising somewhat lately, indicating that OECD
countries economies are likely to expand at a slower pace in the months ahead. Indeed, the leading indicators 12-
month rate of change moderated to 9.7% in April (see Chart 2), the first easing in eight months and from +10.2%
in March and +10.1% in February. 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. Also, the global services sector has started to recruit workers for the first time in
more than two years in May, indicating that the sector will likely be resilient in weathering a slowdown in the months
ahead. In Europe, we expect the sovereign debt problems to be manageable despite the lingering concerns, following
the announcement of an emergency stabilisation loan of 750bn for countries under attack by speculators and the
110bn rescue package for Greece. As a whole, we expect real GDP growth to soften to 4.8% yoy in 2H 2010, from
+8.8% in the 1H.

Chart 2
Malaysia Leading Index vs OECD
20
OECD Composite 15
Leading Index
(RHS)
10
15

12-mth rate of change

6-mth rate of change

10

5
-5
Malaysia Leading index
(LHS)
0
-10
00 01 02 03 04 05 06 07 08 09 10

-5 -15

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