PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

16 July 2010

Business Conditions And Consumer Sentiment

Weakened In The 2Q

◆ The Malaysian Institute of Economic Research’s (MIER) business conditions index (BCI) fell by 4.4 percentage
points to 119.6 in the 2Q, after rising by 5.3 percentage points in the 1Q (see Chart 1). This was the first decline after
picking up for the last five consecutive quarters, suggesting that businesses have turned cautious, in view of
rising economic uncertainties due to the sovereign debt problem in Europe and policy normalisation as well as tightening
undertaken by countries in Asia. Already, exports slowed down for the second consecutive month in May, while
industrial production weakened in April before bouncing back in May. Also, manufacturers have turned cautious in
recruiting workers during the month. As a whole, the drop in BCI index suggests that private investment will
likely ease in 2H 2010, after showing signs of improvement in the 1H of the year. We expect private investment
to moderate to 6.4% yoy in 2H 2010, from an estimate of +7.3% in the 1H. For the full-year, private investment,
however, is projected to bounce back to increase by 6.9% in 2010, from -17.2% in 2009.

◆ Similarly, the MIER’s consumer Sentiments Index (CSI) fell by 3.8 percentage points to 110.4 in the 2Q, after
rising by 4.6 percentage points in the 1Q (see Chart 2). This was the first decline after two consecutive quarters of
improving, suggesting that consumers have turned less upbeat, as they expect job prospects to ease and their
current as well as future incomes may be affected. Indeed, manufacturers slowed down their employment in May,
indicating that they have turned cautious as well. Consumers’ confidence was further affected by concerns over
inflation even though it rose moderately in recent months. Inflation in the country accelerated to 1.6% yoy in May, the
highest in a year and from +1.5% in April. Perhaps, consumers are concerned about the impending removal of
subsidies, particularly fuel subsidy, which will result in a chain effect and worsen inflation in the country. Consequently,
consumers indicate that they plan to delay their spending in the near future. As it stands, the imports of consumption
goods moderated to 11.8% yoy in April-May, after picking up to +18.5% in the 1Q. As a whole, we expect consumer
spending to ease to 4.6% yoy in the 2H of the year, from +5.4% in the 1H. For the full-year, consumer spending
will likely strengthen to +5.0% in 2010, from +0.7% in 2009.

◆ In tandem with a drop in business and consumer confidence, MIER expects economic growth to taper off in 2H 2010,
due to further policy tightening measures and as low-base effects dissipates. Nevertheless, MIER expects the
economy to expand by 6.5% in 2010, before easing to +5.2% in 2011. The MIER raised its real GDP forecast
for 2010 to the current level, from +5.2% projected previously after the country’s GDP jumped by 10.1% yoy in the
1Q. Meanwhile, MIER expects inflation to average 2.2% in 2010 and the overnight policy rate (OPR) will likely settle at
2.75% by end-2010 and increase to 3.25% in 2011. This is broadly in line with our expectation. We expect real GDP
to rebound to +6.8% in 2010, from -1.7% in 2009, before slowing down to +5.0% in 2011. In the same vein, we
believe Bank Negara Malaysia has already done with its interest rate hike this year and the OPR will likely stay at
2.75% for the rest of this year. However, we expect the Central Bank to raise its key policy rate again in early part of
2011 and by a total of 50-75 basis points during the year, pushing the OPR to a more neutral level of 3.25-3.50% by
end-2011.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 16 July 2010

Chart 1 : Business Conditions Index Chart 2 : Consumer Sentiments Index

(BCI) (CSI)
Index Index
140 140

120 120

100 100

80 80

60 60

40 40

20 20

0 0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: MIER Source: MIER

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