Supply chain disruption may hit May exports

KUALA LUMPUR: Export growth may have weakened in May against a backdrop of global supply chain disruption in the electrical and electronic (E&E) sector, which forms the backbone of the country’s external trade.

Economists said the supply chain disruption following the earthquake, tsunami and nuclear disaster in Japan last March could stifle demand and output of E&E component producers in Malaysia because Japan is a major global supplier of silicon wafer, a key raw material in chip manufacturing.

“May export growth could be slower than April due to supply chain disruptions in Fukushima,” said Bank Islam Malaysia Bhd chief economist Azrul Azwar.

Azrul said export growth could have weakened to 10.9% in May from a year earlier while imports might have expanded at a slower pace of 8.7%.

“We can expect less production ... as import growth slows,” he said. May external trade numbers are due today.

In April, Malaysian exports grew 11.11% from a year earlier, helped by higher commodity prices and sale of non-E&E goods. This was, however, offset by a decline in the export of E&E items, due to weaker demand for these products.

During the month, import growth weakened to 9.4% as the country bought less capital and intermediate goods. In March, imports grew 12.1%.

Economists said lower imports of capital goods suggest that business spending could slow down in the coming months, while the decline in intermediate goods purchases indicate that exports might ease going forward.

E&E products make up 34% of Malaysian exports while commodities, including crude oil and palm oil, account for 28% of external sales.

The recent catastrophes in Japan have triggered fears of more downside risks to global economic growth. But given that Japan, the world’s third largest economy which accounts for 9% of the world’s GDP, had over the years lagged global expansion, it is deemed a less significant contributor to global growth, economists said.

Taking into account Japan’s role in the global supply chain as a major producer of components and finished products, especially for the auto sector, any glitch in the chain can affect global production processes in the short term.

RAM Holdings Bhd senior economist Kristina Fong, meanwhile, forecast an expansion of 8.7% for Malaysia’s exports in May and cautioned that commodity exports might weaken going forward in anticipation of capacity constraints due to oilfield maintenance.

Import growth is also expected to moderate, she said, following the build-up in industrial capacity fuelled by private investment. Fong said imports could have expanded 8.5% in May.

Industrial output, as measured by the industrial production index, contracted 2.2% in April from a year earlier, the first decline in 17 months, as manufacturing and mining output fell. In February and March, the IPI rose 2.4% and 5.2%, respectively.

In a note dated June 9, RHB Research Institute said the decline in industrial and manufacturing production in April indicates that economic growth might weaken further in the second quarter.

As such, RHB expects the country’s real GDP growth to moderate further to 4.3% year-on-year in 2Q from 4.6% in 1Q.