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Unusual Shrink In Inventory Worrisome
Malaysia Perspective | 18 June 2010

Written by Bai Wen Chun

Even though Malaysia’s economy is out of the recession, with the first quarter this year registering a double-digit year-on-year growth rate of 10.1% for the first time in 10 years, many people indicated that they are not feeling that this country’s economy is indeed growing as strongly as the figure showed.‬‪

I think this is mainly because of the lower basis of comparison. In the first quarter last year, we were facing a negative growth rate of 6.2%, so when the economy began growing in the first quarter this year, it is definitely a leap-like growth when compared to the same period last year.‬‪

Meanwhile, the remaining quarters of this year is not likely to repeat the double-digit growth of the first quarter. This situation is unlike that in early 1990 before the Asian financial crisis, where we registered several consecutive quarters of high economic growth, a rosy scene that we will not see again.‬

Overwhelming Demand For Exports
‪The strong growth in the first quarter this year was mainly driven by exports that rebounded strongly. In this quarter, exports grew explosively at nearly 20% year-on-year. This means that only companies that mainly engage in export trade or support those companies in these areas would have felt the strong revival in demands from overseas in the first quarter.‬‪

Conversely, companies in other industries would not have felt much of such exuberance. In fact, as far as I know, among the enterprises engaged in export, many are struggling to meet the huge demands, to the extend that some of them are overwhelmed by the huge orders because of staff shortages.‬‪

Although domestic demand has also been warming, its momentum is far from as strong as export demands. In the first quarter this year, domestic demand grew a healthy 5.4% year-on-year, but still barely less that a third of the over-20% growth in exports. Of course, when compared to the 2.8% year-on-year growth in the fourth quarter of last year, there is still ground for cheers.‬‪

Domestic demand growth in the first quarter is driven mainly by private consumption expenditure, which grew by 5.1% year-on-year and was much stronger than the 1.6% year-on-year growth in the fourth quarter of last year. This strong showing is mainly due to greater consumer confidence and a stronger job market. However, the year-on-year growth in domestic investments has slowed in the first quarter to 5.4%, a drop from the previous quarter’s 8.2%. This has partial offset the positive factor from the growth in private consumption.‬‪

With growth in domestic demand falling behind exports, coupled with a weak performance from investments, that would explain why the public in general does not share the sense of euphoria.‬

So, what next? I am beginning to worry. I have seen the momentum of global economic recovery slowing down, which will lead to our exports slowing down. The economic growth will definitely slow down in second half of this year.‬

Worldwide Economies Cooling Off
‪This is mainly because the positive effect of the economic stimulus packages, introduced around the world to counter the financial tsunami and bring about a global economic recovery, is gradually fading off. At the same time, some European countries had adopted austerity measures to deal with their huge budget deficits and the debt crisis, from which the negative impact on the global economy will begin to be felt in the second half of the year.‬‪

On the other hand, some countries are gradually normalizing interest rates and tightening monetary policies, which are expected to put a dampener on economic activities. In fact, the world’s economic engine, China, has started to show signs of an economic slowdown in the second half of the year.‬‪

Nevertheless, I do not think the global economy will slide back into recession again. This is because world economies will normalize and tighten their monetary policies progressively. Furthermore, I believe the current European sovereign debt crisis will be kept under control, despite its lingering sense of doom.‬‪

EU countries have raised 750 billion euros of emergency stabilization loans, and had provided a 110 billion euros rescue package to the Greeks. Europe needs some time to resolve its current debt problem, which means that economic recovery in the euro zone, and eventually around the world, will slow down.‬‪

In addition, I am puzzled by the flurry of Malaysian companies clearing their stocks. If we take a careful look at the gross domestic product datum, you will find that our economy has been steadily unloading our inventories for 11 consecutive quarters, or nearly three years.‬‪

Generally, companies will only stockpile 3 to 6 months’ worth of inventory. Only when production could not meet demand or when manufacturers are uncertain about the economic outlook and are discomfited to accumulate so much inventory would they be in a hurry to off-load their inventory.‬‪

Conversely, manufacturers will only stockpile inventories when they expect a rosy turn in economic outlook, or when their inventories are too low to meet the anticipated demands further down the road.‬‪

From a macro point of view, our national economy should also go through the same process in theory, but not so in reality. More worryingly, in 2009, the process of off-loading inventory was so serious that it accounted for 2.7% of our gross domestic product last year!‬‪

I believe this shows that our production and import are falling behind the growth in demand, leading to our entire economy shedding inventory over these past 3 years. Does this mean that some of our economic datum has been inflated or underestimated? I am not sure, and don’t ask me for the answer!‬

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