Tuesday, September 8, 2009

July Trade: My Crystal Ball Is Murky

Malaysia's trade is slowly improving, even if the yearly growth numbers are still in the negative (log annual changes):

Headline exports increased 8.1% m-o-m, but most of this increase is seasonal:

After seasonally adjustment, m-o-m growth actually slowed for both exports and imports (log monthly changes):

My initial reaction to these numbers were that we were finally seeing some real recovery in external demand, but looking deeper at the data I'm not too sure now. The export numbers beat my model point forecasts handily, although still within forecast confidence intervals. But one thing that is catching my eye is that imports have recovered quicker than exports.

There are two things I can think of that may be causing this. First is my original thesis that we're in the middle of an inventory correction, and exporters are rebuilding stocks depleted in the past year. By cutting production drastically and reducing inventory, exporters conserved cash until they could see some signs of a return to economic normalcy, as is happening now. That would explain the divergence between exports and the relatively faster recovery in imports of intermediate goods:

...while capital goods imports have also yet to fully recover, implying a slower increase in capacity:

But what could have the same effect on imports would be if domestic demand was increasing faster as well. Why I'm thinking this is the unseasonal increase in private consumption embedded in the 2Q GDP data, and the fact that consumption imports have held up relatively well:

Quite possibly we're looking at both effects here. Another reason why I'm less than convinced about the return of external demand is the relative strength of the Ringgit in recent months, which may be inflating export values and overstating export volume.

It hardly matters from a recovery standpoint whether domestic or external demand is driving recovery, but over the longer term the former may signal structural changes in the economy.

Next month's predictions:

Seasonally adjusted model:

Point forecast:RM46743, Range forecast:RM52546-RM40940

Seasonally effect model:

Point forecast:RM51644, Range forecast:RM57784-RM45504

Technical Notes:
July trade data courtesy Matrade.

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