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PP 7767/09/2011(028730)

Economic Highlights


20 October 2010

Leading Index Bounced Back In August, Pointing To

A Resilient Economic Activities Ahead

◆ The Leading Index, which provides an early signal of the direction that the economy is heading, rebounded to
increase by 0.9% mom in August, from -0.1% in July and -0.2% in June. This was the first increase in five
months, suggesting that the leading index, though weakening, remains resilient. The pick-up was underpinned by
increases in real money supply (+0.8%) and CPI for services (+0.1%; inverted) as well as a stronger growth in
the Bursa Malaysia Industrial index (+0.1%). These were, however, offset partially by sharper declines in trade with
eight major trading partners (-0.2%) and unit labour cost in the manufacturing sector (-0.2%) as well as a slowdown
in the number of housing permits approved (+0.2%). Industrial material price index, on the other hand, held stable,
while the number of new companies registered remained unchanged during the month. As a result, the leading
index’s six-month smoothed growth rate bounced back to +2.2% in August, after moderating to +0.9%
in July but off the peak of +11.2% recorded in March (see Chart 1). This was the first rebound, after four
consecutive months of slowing down, indicating that the economy is likely to sustain its growth in the months
ahead, albeit at a more moderate pace.

Chart 1
Leading Index

Index Growth rate*

200 20
160 15
120 10
80 5
40 0
0 -5
00 01 02 03 04 05 06 07 08 09 10

L e a d i n g In d e x ( L H S ) Y / Y (R H S )

* 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

◆ Similarly, the Coincident Index (CI), which is used to monitor the most recent state of the economy, rose by 0.3%
mom in August, after slipping into a contraction of 0.1% in July. This was on account of a pick-up in salaries & wages
of the manufacturing sector (+0.4%) and contributions to the EPF (+0.1%), while industrial production index and
manufacturing sales remained unchanged during the month after a decline in the previous month. These were,
however, offset partially by a sharper decline in gross imports (-0.5%) and a slowdown in employment in the
manufacturing sector (+0.2%). On a six-month smoothed rate basis, the CI index moderated to 5.3% in
August, from +5.6% in July and a high of +9.0% in March. This was the slowest pace of growth in eight months,
suggesting that economic activities are likely to soften in the 3Q, 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,
rebounded to +1.3% mom in August, from -2.0% in July and -0.1% in June. This was due to a pick-up in lending
to the private sector (+0.6%) and the number of new vehicles registered (+0.4%) as well as a stronger growth in
the number of EPF contribution defaulters (+0.4%; inverted). The number of investment projects approved, on the

Peck Boon Soon

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20 October 2010
other hand, held stable, while the 7-day call money remained unchanged during the month. As a result, the six-
month smoothed growth rate of the lagging index moderated to 17.4% in August, from +17.6% in July and a high
of +28.6% in May.

◆ As a whole, the rebound in the leading index’ six-month smoothed rate of change suggests that the country’s
economy is likely to sustain its growth in 2H 2010 and into 1H 2011, albeit at a more moderate pace, in
tandem with a slowdown in the global economy. Already, the slowdown in the world’s major economies, from
the US to Japan and China, has become more widespread since the 2Q, after a strong rebound from the worst
recession since the world war II. 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. Also, the effect of the dissipating global
stimulus spending will likely be felt in the 2H of the year. As it stands, global manufacturing and services activities
slowed down for the fifth straight month in September. Furthermore, manufacturing new orders weakened to the
slowest pace of growth in 15 months, indicating that global manufacturing activities are likely to moderate further
in the months ahead. Similarly, the OECD composite leading indicator’s 12-month rate of change moderated for the
fifth consecutive month to 3.8% in August, the slowest pace of increase in 10 months and from +5.3% in July (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.

Chart 2
Malaysia Leading Index vs OECD
OECD Composite
20 Leading Index 15

12-mth rate of change

6-mth rate of change


Malaysia Leading Index
-5 (LHS) -15
00 01 02 03 04 05 06 07 08 09 10


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