The Economy Remains Widely Robust

According to the latest World Economic Outlook report published by the International Monetary Fund (IMF), the global economy is expected to remain robust at 3.7% through 2018 and 2019 amid moderating international trade, tightening global financing conditions, increasing geopolitical tensions and rising oil prices.

This growth may be mostly due to stable growth in some major advanced economies, especially the US, as well as in most emerging markets and developing economies (EMDEs). However, there are also some risks that endanger this growth process, including escalating trade tensions between the US and its key trading partners, and the possibility of trade restrictions globally, further market corrections, a shift toward protectionist policies, as well as further increase in geopolitical conflicts.

Yet, Malaysia remains resilient. Being an open trade-oriented economy, it continues to benefit from robust global demand for its exports, especially electrical and electronics (E&E) products. According to the economic outlook 2019 published by the Ministry of Finance (MOF), the country’s economic growth is expected to have expanded to 4.8% for 2018 and is projected to increase further to 4.9% in 2019, underpinned by improved global trade as well as strong domestic demand.

Stable Growth for Penang

Over the past five years, Penang’s economy has been growing at an average rate of 5.9% (Figure 1). The state’s GDP growth rate slowed by a 0.3 percentage point to 5.3% in 2017, mostly as a result of the negative 10.1% growth rate in the construction sector.

The agricultural and manufacturing sectors registered higher growth rates at 2.2% and 5.7% respectively in 2017 compared to 2016; however, growth in the services sector slowed down slightly by 0.1 percentage point to 5.6% (Figure 2). Even though growth in Penang’s mining and quarrying sector has dropped from 8.7% in 2016 to 6.2% in 2017, it still exceeded the national average (1%).

The economic structure of Penang is indeed mainly manufacturing and services-oriented. In 2017 the services sector accounted for 49.3% of GDP, while 44.8% was from the manufacturing sector. The agricultural (2%), mining and quarrying (0.1%), and construction (2.6%) sectors, on the other hand, are less significant – altogether accounting for less than 5% of Penang’s GDP.

Penang’s GDP per capita registered a growth rate of 5.3% in 2017, reaching RM49,873, compared to RM47,345 in 2016. It means that there is a strong likelihood that more goods and services are available to consumers and they are in a better position to buy them, since the GDP per capita is the most widely used measure of the standard of living. Penang is ranked third in GDP per capita in 2017, after KL (9.6%) and Labuan (6.6%) (Figure 3).

Steady Growth of the Manufacturing Sector

The manufacturing sector continues to play a key role in boosting the economic growth of Penang. It remains an important source of innovation and competitiveness, and makes significant contributions to external trade, GDP and job creation.

The manufacturing sector plays an important role in employment in the state. It employed 299,200 workers in 2017 – about 36.4% of total employment in Penang, which is the second-largest proportion of employment after the services sector.

In 2017 Penang contributed nearly 13% to the national manufacturing revenue of RM269.8bil, after Selangor (29.4%). The manufacturing sector in Penang recorded better growth in 2017 compared to 2016, which could be relatively due to a vast increase in approved manufacturing investments from RM4.3bil in 2016 to RM10.8bil in 2017, as well as an improved global economy.

Penang continues to attract a remarkable level of investments, both domestic and foreign, into the manufacturing sector. The state received 17% of the total approved investments in the country for 2017, and approximately 10% for the first six months of 2018.

The E&E industry makes up the largest share of Penang’s manufacturing products. In terms of capital investment, the E&E industry had remained the leading industry in 2017, accounting for RM6.7bil or 62% of total investment approved. This industry registered a significantly higher level of investment (287%) in 2017, compared with 2016. It is expected that the E&E industry will continue to contribute to the state’s manufacturing growth in 2018 and 2019, driven mainly by investments from local large companies (LLCs) and small and medium enterprises (SMEs), as well as exponential growth in global demand for electronic (especially semiconductor) components.

The technological revolution, or Industry 4.0, is expected to have a dramatic impact on the manufacturing sector. For instance, increased connectivity and advanced data gathering and analytics capabilities enabled by the Internet of Things (IoT) make it possible to build smarter supply chains and manufacturing processes. Yet, the adoption of Industry 4.0 can also drive changes in the workforce, requiring new skills as it does. Hence, the upskilling of the current workforce and developing the required talent are essential.

The Shift to the Service Economy

Over the years, the role of manufacturing has changed. In fact, the way it contributes to the economy shifts as the country develops and becomes more industralised. It means that the contribution of the manufacturing sector (employment and output) starts declining in favour of the services sector (Figure 4).

The slower growth of the manufacturing sector means that it has been overtaken by the services sector, indicating the growth of shared services and outsourcing (SSO) activities in Penang. The manufacturing sector has begun to consume more services and relies more heavily on them to operate. Due to changes in the economic structure, demand for services as intermediate input, e.g. for business services such as finance, insurance and accounting services, has expanded. As per capita income increases, the economy tends to shift to the services sector.

In 2017 Penang’s services sector grew at 5.6%, driven mainly by wholesale and retail trade; food and beverage and accommodation; utilities, transportation and storage; and information and communication sub-sectors. The services sector is also the largest employer in Penang’s economy – in 2017 the sector contributed 464,000 employment opportunities, or 56% of total employment. Within the services sector, the wholesale and retail trade, and repair of motor vehicles and motorcycles sub-sector was the biggest employer, with 135,000 workers or 16.4% of total employment, followed by the accommodation and food service activities sub-sector (8.4%).

Tourism-related activities (i.e. wholesale and retail trade; and accommodation and food services activities) are significant contributors to the services sector. The tourism industry is the second largest source of income in Penang, after the manufacturing sector. Over the past decade, Penang’s tourism industry has experienced an upward trend. In 2017 about 3.6 million visitors, both domestic and international, arrived at Penang International Airport (PIA), an increase of 8.1% compared to 2016 – driven largely by domestic tourism (Figure 5).

Although domestic visitors significantly outnumbered international passengers, the highest growth rate was recorded for international travellers. The top six international visitors arriving at PIA in 2017 were from Singapore (42.7%), Indonesia (27.5%), Thailand (13.5%), Hong Kong (9.7%), China (4.3%) and Taiwan (2.3%). These countries show significant increases of passengers in 2017 compared to 2016, especially visitors from Thailand (73%). Statistics from Penang Port also show that the number of international cruises as well as their number of passengers both increased dramatically by 762.5% and 271.2% respectively.

Growth in the services sector is expected to remain resilient in 2018 and 2019, mainly supported by the wholesale and retail trade subsector as a result of higher consumption activities, particularly the three-month zero-rated GST period as well as the upward revision of the minimum wage rate. Furthermore, increased digitisation activities in the economy, strong demand for Information and Communications Technology (ICT), sustained demand for professional services as well as increased tourism activities are anticipated to provide additional impetus to the growth of the sector.

External Trade Performance

Penang’s total volume of external trade increased significantly, by nearly 20% in 2017 mainly supported by improved global demand and robust domestic activities. In 2017 Penang’s exports, imports and trade surpluses skyrocketed by 20.7%, 18.2% and 36.3% respectively, compared to 2016 (Figure 6).

The increase was brought by the positive growth of all major import and export commodities, with miscellaneous transactions and commodities recording the highest export and import growth rates of 158.9% and 35.4% respectively. The trade surplus on the other hand increased remarkably by about 50% in the last five months of 2017 compared to January- July 2017. It also recorded an additional surplus of about RM7.5bil compared to that of the same period in 2016, most likely due to growth in export value, as a result of the somewhat stronger ringgit.

In 2017 machinery and transport equipment accounted for a remarkable proportion of Penang’s total gross exports and imports, at 69% and 65.4% respectively. These include general industrial machinery and equipment; office machines and automatic data processing; telecommunications and sound recording and reproducing apparatus; electrical machinery; apparatus and appliances; and road vehicles. This implies that Penang’s external trade is highly driven by the E&E industry. In fact, this industry has greatly benefited from growing global demand in the usage of mobile devices (smartphones, tablets), storage devices (cloud computing, data centres, personal data drives), optoelectronics [photonics, fibre optics, light-emitting diodes (LEDs)] and embedded technology (integrated circuits, printed circuit boards, LEDs).

Penang’s trade continued to show a positive trend in 2018. For the first 10 months of 2018, Penang’s trade registered an additional surplus of about RM52.7bil compared to that of the same period in 2017, with 26.6% increase in exports and 1.2% decrease in imports. Machinery and transport equipment remained the largest exported and imported commodity in the first 10 months of 2018.

The North Butterworth Cargo Terminal (the seaport) and Bayan Lepas air cargo are two main gateways for trade in Malaysia. In 2017 the North Butterworth Cargo Terminal registered the third-highest trade value among the major seaports in Malaysia – after Port Klang and Pasir Gudang in Johor. The export and import values gathered at this port were about RM50.7bil and RM39.6bil respectively, which grew by 12.7% and 21.3% in 2017 compared to 2016. In the first four months of 2018, its exports value dropped slightly, by 0.8%, while the value of its imports increased by 3.4% compared to the same period in 2017.

Penang International Airport is ranked number one among all air cargos nationwide by trade value. Its exports and imports values amounted to RM17.7bil and RM14bil in 2017 – an increase of 23.8% and 17.7% respectively compared to the year before. In the first 10 months of 2018, the value of its exports increased remarkably by 35.8%, while its imports value dropped by 3.5% compared to the same period in 2017.

In line with the increase in global trade activities, strong domestic investment and its role as the main electronics hub for South-east Asia, Penang’s external trade position is expected to remain generally robust. This is supported by significant growth in the global manufacturing sector, with 12.4% increase in the world semiconductor market in 2018 compared to 2017, as forecasted by the World Semiconductor Trade Statistics (WSTS), as well as higher crude oil prices. Furthermore, a healthy trade balance is expected for 2018 as a result of the ringgit’s appreciation against many major currencies, which may lead to lower import costs and higher export prices.

Labour Market Remains Stable

Penang’s labour force participation rate (LFPR) has been gradually growing over the past decade (Figure 7). In 2017, however, LFPR dropped 1.5 percentage points to 67.5%, compared to 69% in 2016. The total number of employed persons also decreased slightly, by about 0.6% – from 827,400 people in 2016 to 822,200 in 2017.

Yet, Penang’s unemployment rate stayed low at 2.1% in 2017, far below the national level of 3.4%, mainly due to low retrenchment activities and frictional unemployment (Figure 8). Penang registered the third-lowest rate of unemployment in Malaysia, trailing behind Putrajaya (1.8%) and Melaka (0.9%). This indicates that Penang’s economy is still operating in full employment.

Eduardo Arroyo, The Four Dictators (1963) Museo Reina Sofia, Madrid.

The youth unemployment rate in Penang increased from 5.5% in 2016 to 6.9% in 2017, which was mainly due to the increase of unemployed workforce with tertiary education from 2.6% in 2016 to 2.8% in 2017. This is possibly due to skills mismatch, where there is imbalance between skills supply and skills demand in the labour market. Hence, collaboration between the government, universities and industries are needed to solve this problem. However, youth unemployment in Penang can be considered low when compared to the national average of 10.8% in 2017. Female LFPR in Penang stood at 56% in 2017, while male LFPR mounted to 79%. Although gender disparity in the workforce has been narrowing over the last decade, it still remains evident in the labour market.

The services and manufacturing sectors remain major sources of employment in Penang. In 2017 employment in the manufacturing sector expanded by 9.8%, while the size of employment in the services sector declined by nearly 3.5%.

The proportion of employed persons with tertiary education decreased slightly to 32% in 2017, yet those employed in highskilled positions increased to 33.4%. Although Penang has one of the largest shares of highly educated labour force in the country, skill and talent shortage is still one of the major challenges facing employers in Penang.

The Way Forward

Penang’s economic growth is expected to remain stable in 2019 as a result of a strong trade, continuous expansion in the E&E industry, higher oil prices as well as resilient domestic consumption.

Technological change in general and the emergence of the digital economy in particular are important factors that drive economic growth and development in both Malaysia and Penang in the long term. Emerging technologies and business models as well as improved access to the internet and ICT will continue to reshape the manufacturing and services sectors.

To achieve inclusive growth via digitalisation, the development of supportive infrastructure, reformed trade and investment policies, as well as policies to address labour market challenges are greatly needed.

Negin Vaghefi is a senior analyst at Penang Institute. She holds a Ph.D. in Environmental Economics. Her research interests include agri-environmental economics, climate change, green economics, poverty and income inequality, and policy analysis.

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