PP 7767/09/2010(025354)

Economic Highlights
Global
ï
MARKET DATELINE

2 June 2010

1 Global Manufacturing Activities Showing Signs Of

Weakness

2 US Manufacturing Activities Moderated But

Construction Spending Rose

3 Euroland’s Manufacturing Activities Slowed Down In

May

4 China’s Manufacturing Activities Slowed Down In

May

5 India’s Manufacturing Activities Picked Up But

Exports Moderated

6 Indonesia Exports Moderated And Inflation Picked

Up

7 Thailand’s Inflation Picked Up In May

Tracking The World Economy...

Today’s Highlight

Global Manufacturing Activities Showing Signs Of Weakness

Manufacturing activities from China to the US and Euroland showed signs of weakness in May, suggesting that a rebound
from the worst global recession since World War II is beginning to ease and global economic growth will likely grow at
a more moderate pace in 2H 2010. As it stands, the global Purchasing Managers Index (PMI) for the manufacturing
sector, an index compiled by JP Morgan and Markit Economics in London, moderated to 57.2 in May, from 57.8 in April
and compared with 56.8 in March. Readings above 50 indicate the sector is expanding while readings below 50 denote
contraction. This was the first month of easing after picking up for two consecutive months, on account of slower
increases in both output and new orders. Similarly, input prices eased during the month, pointing to a slowdown in price
pressure. Manufacturers, however, continued to increase their recruitment of workers during the month.

Chinese manufacturing, which led a rebound from the US to Japan, has been in expansion mode for the last 15
consecutive months. However, it is beginning to show signs of weakness after weakening to the lowest level in three
months in May, amid a drop in property sales and building, following a crackdown on property speculation by the
authorities. At the same time, Chinese policymakers have trimmed stimulus spending this year after a US$1.4 trn jump
in new lending which help to revive economic growth in 2009. The policymakers are targeting to cut new loans by 22%
in 2010 and have sold bills and raised banks’ reserve requirements to suck money out of the financial system. The
situation was compounded by Europe’s sovereign debt crisis which further eroded investor confidence. Chinese Premier
warned yesterday that the world needs to guard against the possibility of a second economic slump.

Peck Boon Soon

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

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In the same vein, the US manufacturing index eased in May, from a near six-year high in April. Similarly, manufacturing
activities in Euroland showed its first signs of weakness in eight months and since it returned to positive growth in October
last year. Indeed, companies from the US to Germany have, to some extent, relied on faster growth in emerging markets
to boost sales. With Chinese economic activities showing signs of easing coupled with the stimulus spending dissipating,
it could impact the developed economies’ exports in the months ahead.

The US Economy

Manufacturing Activities Moderated In May

◆ The US Purchasing Managers Index (PMI) of the Institute for Supply and Management (ISM) for the manufacturing
sector eased to 59.7 in May, after rising to a near six-year high of 60.4% in April. This suggests that manufacturing
activities have moderated somewhat but it remained strong during the month. Readings above 50 indicate the sector
is expanding while readings below 50 denote contraction. The moderation was due to softer production and supplier
deliveries as well as a sharper drop in inventories, suggesting that manufacturers have turned cautious given economic
uncertainties following a deepening of the Euroland’s sovereign debt crisis. These were, however, mitigated by a pick-
up in new export orders and backlog of orders, while new orders remained stable during the month. Input costs eased
slightly in May, pointing to an ease in price pressure. As a whole, the readings suggest that the US economy will
likely continue to expand in the 2Q, after recording a slower annualised rate of growth of 3.0% in the 1Q.

Construction Spending Rose In April

◆ US construction spending strengthened to 2.7% mom in April, from +0.4% in March. This was the strongest
growth since 2000, as the government’s tax credit incentive boosted new homesales and spurred builders to break
ground on more houses. As a result, private construction activities rebounded to increase by 2.9% mom in April,
the first increase in six months and from -0.5% in March, on account of stronger growth in both residential and non-
residential construction activities. Similarly, public spending on construction strengthened to 2.4% mom in April, from
+2.0% in March, due to higher residential construction activities and a turnaround in non-residential construction
activities during the month. As a whole, this suggests that construction activities will likely contribute positively
to the US economy in the 2Q.

The Euroland Economy

Euroland’s Manufacturing Activities Slowed Down In May

◆ Euroland’s Purchasing Manager Index (PMI) for manufacturing sector ease to 55.8 in May, from 57.6 in April.
This was the first easing after the index stayed at above the 50-mark since October 2009, suggesting that
manufacturing activities in the region are beginning to show signs of weakness and its economic recovery may struggle
to gather strength in the 2H of the year. The Euroland real GDP posted a positive growth of 0.2% qoq in the 1Q,
after remaining unchanged in the 4Q.

Asian Economies

China’s Manufacturing Activities Slowed Down In May

◆ China’s Purchasing Managers Index (PMI) for the manufacturing sector eased to 53.9 in May, from 55.7
in April and 55.1 in March. This was the slowest pace of increase in three months, suggesting that manufacturing
activities might have peaked and are beginning to trend lower, following the introduction of tightening
measures to cool down the country’s property market. The slowdown was due to slower increases in both new and
export orders as well as output, supplier delivery system and inventory rebuilding. These were made worse by a
decline in backlogs of work. As a result, manufacturers slowed down their workers recruitment during the month.
Meanwhile, input prices slowed down sharply in May, after rising significantly in April, pointing to easing price pressure.
As a whole, the reading adds to signs that the country’s economic growth will likely expand at a more moderate pace
in the 2H of the year, after recording a stronger growth of 10.9% yoy in the 1Q.

Page 2 of 4
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 2 June 2010

India’s Manufacturing Activities Picked Up But Exports Moderated

◆ India’s Purchasing Managers Index (PMI) for the manufacturing sector bounced back to 59.0 in May, from
57.2 in April. This was the strongest growth in more than two years, suggesting that manufacturing activities
in India continued to expand and at a faster pace. A sustained growth in manufacturing activities will help
to sustain India’s economic growth into the 2Q, after a pick-up in the 1Q.

◆ India’s exports, however, moderated to 36.2% yoy in April, from +54.1% in March. Despite the moderation,
growth remained commendable which is likely to help supporting the country’s real GDP growth. A sustained growth
in economic activities would add pressure on the Reserve Bank of India to tighten its policy amidst economic
uncertainties arising from Europe’s sovereign-debt crisis. India’s central bank, however, indicated on 19 May that
it will raise rates only cautiously even though inflationary pressure is rising. In a move to tighten monetary
conditions, the Reserve Bank of India raised its key policy rate twice in a month to 5.25% on 20 April. It further
indicated that an interest rate move before the next monetary policy meeting scheduled for 27 July cannot be ruled
out.

Indonesia Exports Moderated And Inflation Picked Up

◆ Indonesia’s exports moderated to 42.6% yoy in April, from +48.3% in March and +56.5% in February. This
was the third straight month of easing, indicating that demand for the country’s exports is softening. The moderation
was due to a slowdown in the exports of non-oil & gas products, which eased to 36.8% yoy in April, from +44.6%
in March and a peak of +49.1% in February. This was, however, mitigated by a pick-up in the exports of oil & gas,
which bounced back to 75.6% yoy in April, after easing to +69.2% in March, on the back of a slowdown in the exports
of crude oil and oil products. Imports, on the other hand, strengthened to 72.0% yoy in April, from +67.4% in
March and +59.9% in February. This was the fourth consecutive month of picking up, pointing to a pick-up in
domestic demand. Notwithstanding a slowdown in exports, Indonesia’s economy will likely sustain its growth
in 2Q 2010, after recording a stronger growth of +5.7% yoy in the 1Q.

◆ Indonesia’s inflation rate accelerated to 4.2% yoy in May, from +3.9% in April and +3.4% in March. This was
the highest in 12 months but was still within Bank Indonesia’s target of 4-6%, indicating that the central bank may
not be in a hurry to raise its key policy rate. Bank Indonesia has left its key policy rate unchanged at 6.5% since
August 2009 to support the economy and indicated that it may keep its benchmark interest rate unchanged
this year, if inflation stays within expectation. The pick-up in inflation rate was on account of a faster increase in
prices of food and clothing, which rose by 6.7% and 4.4% yoy respectively in May, compared with the corresponding
rates of +5.9% and +2.7% in April. These were, however, mitigated by slower increases in prices of processed food
and the costs of healthcare, while the costs of housing, education and transport remained stable during the month.

Thailand’s Inflation Picked Up In May

◆ Thailand’s inflation rate bounced back to 3.5% yoy in May, from +3.0% in April. This was the first pick-
up, after easing for the last three consecutive months, pointing to a slight upward price pressure. Stronger inflation
rate was reflected in higher food prices, which grew at a faster pace of +4.6% yoy in May, compared with +3.7%
in April. Similarly, prices of non-food items bounced back to +2.8% yoy in May, after slowing down to +2.5% in
April. This was mainly on account of an increase in prices of clothing & footwear in May, a reversal from a decline
in the previous month. This was made worse by a smaller decline in the costs of recreation & education during the
month. These were, however, mitigated by a slowdown in the costs of housing and transport. Despite a pick-up
in inflation, the Bank of Thailand will likely hold its key policy rate stable in the near term, following the
political unrest that has affected the country’s economic activities. Unlike Malaysia, the Bank of Thailand has yet
to normalise its monetary conditions, after leaving the key policy rate unchanged at a 5-year low of 1.25% since
April 2009.

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