PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•MARKET DATELINE

22 September 2010

Leading Index Eased Further In July, Indicating

Economic Slowdown In 2H 2010 Will Likely Extend
Into 1H 2011

◆ The Leading Index, which provides an early signal of the direction that the economy is heading, fell by 0.2%
mom in July, the same rate of decline as in June and compared with -0.1% in May. This was the fourth straight
month of decline, suggesting that the leading index is weakening. Declines in trade with eight major trading partners
(-0.2%), money supply (-0.1%), CPI for services (-0.1%; inverted) and the number of new companies registered
(-0.1%) as well as a slowdown in the Bursa Malaysia Industrial index (+0.1%) were mitigated by a pick-up in the
number of housing permits approved (+0.3%) and smaller declines in industrial material price index (-0.1%) as well
as unit labour cost in the manufacturing sector (-0.1%). As a result, the leading index’s six-month smoothed
growth rate grew at a more moderate pace of 0.6% in July, compared with +1.7% in June and a high of
+11.2% in March (see Chart 1). This was the fourth consecutive month of slowing down and the slowest pace of
increase in 16 months, indicating that the economy is likely to slow down in 2H 2010, after expanding by a
strong +9.5% yoy in the 1H.

◆ Similarly, the Coincident Index

Chart 1
(CI), which is used to monitor the Leading Index
most recent state of the economy,
Index Growth rate*
slipped into a contraction of 0.4%
200 20
mom in July, after slowing down to 180

+0.1% in June. This was attributed 160 15

140
to declines in gross imports (-0.1%) 120 10

and contributions to the EPF (-0.1%), 100

80 5
while salaries & wages in the 60

manufacturing sector fell by a larger 40 0

20
magnitude of -0.2% during the 0 -5
00 01 02 03 04 05 06 07 08 09 10
month. These were, however,
mitigated by a pick-up in
L e a d i n g In d e x ( L H S ) Y / Y (R H S )

employment in the manufacturing * Growth rates are expressed as compound annual rates based on the ratio of the current month’s
index to the average index during the preceeding 12 month
sector (+0.3%). Industrial
production index and manufacturing
sales, on the other hand, fell by the same magnitude as in the previous month. On a six-month smoothed rate
basis, the CI index eased to 5.1% in July, from +6.8% in June and a high of +9.0% in March. This was the
slowest pace of growth in six months, suggesting that economic activities are likely to soften in the months
ahead, after moderating to +8.9% yoy in the 2Q.

◆ In the same vein, the Lagging Index (Lag), which serves to confirm what had happened to the economy, fell by
a larger magnitude of 0.9% mom in July, compared with -0.1% in June and +4.2% in May. This was due to a decline
in the number of new vehicles registered (-0.3%) and a slowdown in the number of EPF contribution defaulters
(+0.3%; inverted), while the number of investment projects approved stagnated. These were, however, mitigated
by a pick-up in 7-day call money and a smaller decline in lending to the private sector (-1.1%). As a result, the
six-month smoothed growth rate of the lagging index slowed down to 20.0% in July, from +25.5% in June and a
high of +28.6% in May.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 22 September 2010

◆ As a whole, the slowdown in the

Chart 2
leading and coincident indices’ six- Malaysia Leading Index vs OECD
month smoothed rate of change OECD Composite
suggests that the country’s 20 Leading Index 15
(RHS)
economic slowdown in 2H 2010 10
15
will likely extend into 1H 2011,

12-mth rate of change

6-mth rate of change
in tandem with a slowdown in the 5

➤
10
global economy. Already, the slower 0
growth in the world’s major 5
economies, from the US to Japan -5

➤
and China, has become more 0
-10
widespread since the 2Q, after a Malaysia Leading Index
(LHS)
strong rebound from the worst -5 -15
00 01 02 03 04 05 06 07 08 09 10
recession since the world war II.
Indeed, the latest economic data
releases suggest that the growth in
these countries will likely soften further in the 2H of the year and extend into 1H 2011. As it stands, global
manufacturing activities have slowed down for the fourth straight month in August and it was the slowest pace of
increase in nine months. In particular, manufacturing new orders weakened to the slowest pace of growth in 14
months and since it turned into positive growth in July 2009, indicating that global manufacturing activities are likely
to moderate further in the months ahead. Similarly, global services activities slowed down for the fourth consecutive
month in August. In the same vein, the OECD composite leading indicator’s 12-month rate of change
moderated for the fourth consecutive month to 5.3% in July, from +6.8% in June and after reaching the peak in
March (see Chart 2), indicating that OECD countries’ economies are likely to expand at a slower pace in the months
ahead. As a whole, we expect real GDP growth to slow down to 5.0% in 2011, from +7.3% estimated for 2010.

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