Slower full-year growth expected

Lower industrial production in May a strong sign

By FINTAN NG

PETALING JAYA: May's lower factory output as measured through the industrial production index (IPI) more or less confirms that economic growth for the second quarter and for the full year will be slower.

Although not unexpected, with the Government already forecasting year-on-year gross domestic product (GDP) growth to be between 5% and 6% this year against 7.2% growth in 2010, external factors should make things all the more challenging and uncertain.

Three of these factors weigh on global GDP growth: China's inflation, which hit a three-year high of 6.4% in June, the stubbornly high jobless rate in the United States and contagion fears in the eurozone.

HSBC Global Research's co-head Asian Economics Frederic Neumann said in a July 10 report that the persistent US high unemployment rate would mean a weaker summer employment outlook.

“Asia will feel the chill mostly through exports. In fact, we've recently highlighted that export order growth has continued to slow across the region in June,” he said.

Neumann said stagnating external demand would persist beyond the end of Japanese supply chain disruptions, which was the main cause of Malaysia's drop in factory output.

He said policymakers in the region would still proceed with a gradual and cautious adjustment to interest rates due to inflationary pressure.

This adjustment would have to be balanced against currency appreciation, which would impact exports growth.

“This, as we have long argued, is not simply a lagged effect of rising food and oil prices earlier this year, but reflects an underlying deterioration in the trade-off between inflation and growth in the region,” Neumann added.

He said there was clearly a need to raise key interest rates further despite slower growth in the second quarter because Asia's inflationary pressure was due to excess capacity not being able to cope with demand.

JPMorgan Chase Bank's Singapore-based economist Ong Sin Beng expects industrial production to remain soft though some stabilisation may be expected in the June data before a recovery in the third quarter.

“The main uncertainty is not so much with the direction of the data but with the strength of the recovery and this requires a somewhat firmer final demand footing in the third quarter,” he said in a report.

Ong said while some of the slowing owed to a moderation in final demand in the developed economies, a large part was due to an inventory adjustment following the sharp expansion in production in the first quarter.

“In that context, the second-quarter softness is somewhat similar to the third quarter 2010 slowing, which took three months to reach the trough from the production peak,” he added.

The Statistics Department on Monday released May's IPI figures, which showed factory output declined 5.1% from a year ago, more than the median expectation of a 2.7% fall in a Bloomberg survey. This was also more than double the 2.2% drop recorded in April.

The Government forecasts GDP to grow 5% to 6% this year with most economists expecting GDP to grow around 5.5%. Last year, growth came in at 7.2% year-on-year.

GDP expanded 4.6% for the first quarter with economists expecting second-quarter growth to be slower on weaker external demand.