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Surging Growth In The Construction Industry
Malaysia Perspective | 27 September 2012

By Yang Ming Wan

The Malaysian economy grew at a surprising rate of 5.4% in the second quarter, not only exceeding the generally expected 4.6% by a comfortable margin but also surpassing even the most optimistic market forecast of 5.2%.

This is the second time this year that the country’s gross domestic product (GDP) exceeded market expectations. In the first quarter of this year, the market had expected the economy to grow by between 4.3% to 4.5%; eventually, the preliminary figures announced in June indicated that the GDP grew at 4.7%. When the economic figures for the second quarter was released in August, Q1′s growth was revised upwards to 4.9%.

With a revised Q1 growth rate of nearly 5% and a surprising breach of the 5% threshold in Q2, the Malaysian economy therefore grew at 5.1% this first-half of 2012. It is now one step nearer to the annual target of 5% set at the beginning of this year.

Two consecutive quarters of double-digit growth
There is a common theme behind the Malaysian economy outperforming market expectations twice in a row – the stellar performance of the construction sector, which outpaced the growth in the other four key sectors by a big margin. It grew by 15.5% in the first quarter, followed by a further growth of 22.2% in the second quarter.

Incidentally, it is the only sector to achieve double-digit growth.

Looking at how the economic growth has evolved, the growth models in the first two quarters are basically the same: the highest growth rate was achieved by the construction sector, followed by the services sector in second place with a 5.3% growth in Q1 and 6.3% in Q2; manufacturing sector ranked third, with a 4.4% growth in Q1 and 5.6% in Q2.

The growth in the construction sector over these two quarters left its closest competition far behind. It has, without a doubt, become the engine of economic growth in the first half of this year.

The small engine head that is pulling 24 carriages
This capable engine head also happens to be the smallest in the five production sectors, as well as the only sector that fell short of the RM10 billion mark in our quarterly GDP. In the second quarter of this year, the market value of the construction sector accounted for less than RM 8.6 billion of our GDP.

The honour of the largest economic production sector for Malaysia goes to the services sector, contributing as much as RM 115.6 billion to the GDP in the second quarter, which is equivalent to more than 13 times, the construction sector. Claiming second spot is the manufacturing sector, with a total of RM 56.9 billion. Although less than the service sector by approximately half, it is still equivalent to more than six times, the construction sector.

This little engine head managed to pull along a long train of carriages, from the service and manufacturing sectors which are respectively longer than it by more than 13 and 6 times, followed by the mining and quarrying sector which is nearly three times as long, to Agriculture, Forestry and the Fishery sector which is twice as long. This scenario is the equivalent of a single engine head pulling along 24 carriages.

Speed up growth in the service and manufacturing sectors.
Even though the construction sector contributed a mere 3.7% of the GDP, the knock-on effect it brought about accelerated the growth in the services and manufacturing sectors, which separately accounted for about half and a quarter of the Malaysian GDP.

The construction sector managed to achieve two consecutive quarters of double-digit growth in the first half of this year mainly because the Government took steps to take up the slack in the delayed infrastructure projects under the last Malaysia Plan, such as the Second Penang Bridge, the Second Kuala Lumpur International Airport, the Sabah-Sarawak natural gas pipeline and other peripheral development plans.

As the domestic property market was already booming and even tending towards overheating, once the pace of these infrastructure projects picked up, the stimulating effect on the economy rippled outwards and brought about the stronger-than-expected growth over the first two quarters.

Even though the Malaysian economy should achieve its 5% growth target on the back of this accelerated growth, the surging growth in the construction industry may subsequently bring about unwanted after-effects to the economy.

Spectre of asset inflation raised
According to figures from the Bureau of Statistics, the distribution of the gross value of construction projects in the second quarter of this year has already changed significantly.

Though domestic property projects still accounted for about a quarter of all the projects, just like the second quarter of last year, civil engineering – which deals mainly with infrastructure developments – already accounts for 34.6% of all projects, a significant increase from the 23.5% over the same period last year. Non-residential property projects took up the remaining one-third of all projects.

The Greater Kuala Lumpur infrastructure development plans under the Economic Transformation Plan has not really been activated in the first half of this year. Once these plans are started, the proportion of infrastructure and non-residential property projects will further expand, and that entails a proportionate decline of residential property projects, thereby bringing up construction costs.

This may eventually lead to asset inflation, and cause the cost of living to go up. When that happens, the Government will have to intervene through regulatory measures, and that would cause the construction sector and the housing market to become more agitated.

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