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Author: AmInvest   |   Latest post: Fri, 13 Dec 2019, 9:23 AM

 

Malaysia – Upside surprise in growth

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The economy expanded faster than expected by the market and our consensus of 4.5% in 4Q2018. It grew by 4.7% y/y compared with 4.4% y/y in 3Q2018. Hence, 2018’s calendar year growth averaged at 4.7% y/y amid trade escalation and tighter global financial conditions; marginally higher than our projection of 4.6% while slightly lower than the government’s 4.8% estimate.

For 2019, we project growth to hover around 4.5%–4.8%, lower than the official’s projection of 4.9%. Growth will continue to be supported by the private sector particularly on private consumption in view of the healthy labour market, stable inflation, conducive financing and higher minimum wages. Public consumption and investment will also remain muted with the continued fiscal consolidation path.

The challenge in 2019 remains elevated from both domestic and external headwinds. On the domestic front, downside risks include: (1) easing consumer confidence; and (2) volatile oil prices. However, 2018 inventories shaved 1.5ppts of GDP growth. It could mean that the inventory cycle could potentially provide some upside. Meanwhile, external demand is expected to be softer than in 2018 as key cyclical indicators are pointed to the downside. For now, we project global growth to moderate to 3.6% in 2019 should global risk is broadly balanced.

On the monetary policy, we maintain our vote that the OPR will remain at 3.25% as the current rates remain accommodative amid benign inflation environment. However, with the economy has limited fiscal space, there is some room for BNM to cut rates by 25bps in 2Q2019 should key challenges materialize.

  • The economy expanded faster than expected by the market and our consensus of 4.5% in 4Q2018. It grew by 4.7% y/y compared with 4.4% y/y in 3Q2018. Hence, 2018’s calendar year growth averaged at 4.7% y/y amid trade escalation and tighter global financial conditions; marginally higher than our projection of 4.6% while slightly lower than the government’s 4.8% estimate.
  • On the demand side, domestic demand moderated to 5.6% y/y from 6.9% y/y in 3Q2018 owing to slower growth in gross fixed capital formation, up 0.3% y/y from 3.2% y/y in 3Q2018. Nonetheless, private sector continued to perform favourably albeit at a slower pace. Private consumption continued to record a notable growth of 8.5% y/y in 4Q2018 from 9.0% y/y in 3Q0218. Despite the frontloading purchases during the tax holiday period in 3Q2108, consumption was largely supported by steady income and labour market as well as special payments to civil servants and pensioners.
  • Private investment growth however moderated to 4.4% y/y in 4Q2018 versus 6.9% y/y in 3Q2018, underpinned by sluggish capital spending across the major economic sectors. However, we expect private investment to be one of the key drivers in 2019 supported by ongoing multi-year projects as well as materialisation of approved investments, particularly in the manufacturing sector.
  • Public consumption expanded modestly to 4.0% y/y compared with 5.2% y/y in 3Q2018 owing to moderate growth in supply and services while public investment growth continued to decline albeit at a slower pace to -4.9% y/y from – 5.5% y/y in 3Q2018 owing to ongoing public spending rationalization.
  • On the supply side, we noticed the sector largely continued to expand save for agriculture. The services and manufacturing sectors continued to be the engine to the economy as they expanded by 6.9% y/y and 4.7% y/y respectively in 4Q2018 compared with 7.2% y/y and 5.0% y/y respectively in 3Q2018. Apart from the robust consumer spending supporting the services sector, we noticed demand picked up in the information and communication (ICT) subsector attributed to lower fixed broadband prices following the implementations of the Mandatory Standard Access Pricing (MSAP) mechanism. Meanwhile, the electrical & electronics (E&E) segment continued to be the key driver in the manufacturing sector due to global frontloading exercise in anticipation of higher trade tariffs.
  • Meanwhile, supply shocks from commodity-related sectors eased with mining rebounding to 0.5% y/y from -4.6% y/y in 3Q2018 supported by higher crude oil output while agriculture continued to decline at a slower pace of -0.4% y/y versus - 1.4% y/y in 3Q2018. Despite the supply disruption receding and new production facilities commencing, we remain cautious on these sectors due to volatile commodity prices.
  • Meanwhile, the current account balance of payment as a percentage of GNI (CABOP%GNI) widened to 3.0% in 4Q2018 compared with 1.1% in 3Q2018 following a larger trader goods surplus of RM33.0bil. Besides, CABOP%GNI was supported by small income deficit, particular in the primary income account at RM12.0bil in 4Q2018 from –RM15.0bil in 3Q2018 owing to higher income generated by Malaysian firms investing abroad and lower profits accrued to foreign investors in our economy.
  • For 2019, we project growth to hover around 4.5%–4.8%, lower than the official’s projection of 4.9%. Growth will continue to be supported by private sector, particularly on private consumption in view of the healthy labour market, stable inflation, conducive financing and higher minimum wages. Public consumption and investment will also remain muted with the continued fiscal consolidation path.
  • However, the challenge in 2019 remains elevated from both domestic and external headwinds. On the domestic front, the downside risk to consumption remains owing to easing consumer confidence. Besides, oil prices, which are currently below Budget 2019’s assumption of US$70/bbl, constitute a risk to both growth and the fiscal mathematics. However, 2018 inventories shaved 1.5ppts of GDP growth. It could mean that the inventory cycle could potentially provide some upside.
  • External demand is expected to be softer than in 2018 as key cyclical indicators are pointed to the downside. But further downside risk remains following uncertainties such as: (1) ongoing talks of the US-China trade war; (2) US Fed policy and the risk of US economy falling into recession; (3) rocky path for China’s growth: (4) a euro slowdown; and (5) political noises in Brexit. For now, we project global growth to moderate to 3.6% in 2019 should global risk is broadly balanced.
  • On the monetary policy, we maintain our vote that the OPR will remain at 3.25% as the current rates remain accommodative amid a benign inflation environment. However, with the economy having a limited fiscal space, there is some room for BNM to cut rates by 25bps in 2Q2019 should key challenges materialize.

Source: AmInvest Research - 15 Feb 2019

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