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PublicInvest Research

Author: PublicInvest   |   Latest post: Mon, 24 Jun 2019, 10:33 AM

 

1Q19 GDP - Resilient GDP Growth

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OVERVIEW

Malaysia delivered a resilient 1Q19 GDP growth amid the chaos in global trade that has affected not only trade but also investment activities. Using a new base year of 2015, 1Q19 GDP moderated to 4.5% YoY, 0.8-pps slower than 5.3% in 1Q18, supported by resilient domestic demand which remained as the primary growth driver. It picked up the slack left by trade which cooled off due to the US China tiff. 1Q19 GDP was above consensus expectation of 4.3% but below our projection of 5.0% no thanks to uncertainty caused by challenging global macro conditions. Domestic demand delivered favourable numbers (1Q19: 4.4%; 1Q19: 4.1%) assisted by encouraging employment conditions, accommodative interest rate environment and benign inflation that powered overall expenditure. Sustained private sector activity (1Q19: 5.9%; 1Q18: 5.2%) more than offset the lower public sector contribution (1Q19: -1.4%; 1Q18: -0.3%) as fiscal expenditure remained chained by cost consolidation efforts.

1Q19 growth was however dampened by commodity-specific shocks faced by mining (1Q19: -2.1%; 1Q18: -0.6%) although agriculture managed to stage a strong rebound (1Q19: 5.6%; 1Q18: 3.1%) thanks to the recovery in oil palm yields and rubber production. Note that CPO stock levels remained high (1Q19: 2.91mn tonnes; +18.8% YoY) with no sight of easing soon, consistent with our flat CPO price projection for the year of RM2,200 per tonne. Mining output remained unstable due unplanned closure of production facilities though output may rebound and normalize once the shutdown is over.

Domestic demand was resilient in 1Q19, up 4.4% YoY (1Q18: 4.1%), lifted by strong private consumption expenditure (1Q19: 7.6%; 1Q18: 6.6%). Private investment growth moderated (1Q19: 0.4%; 1Q18: 0.5%), dampened by trade uncertainty and prevailing weaknesses in the broad property segment though there was some support from the manufacturing and services sectors. Resilient private sector expenditure was offset by weaker public sector contribution (1Q19: -1.4%; 1Q18: -0.3%) amid the marked slowdown in public investment (1Q19: - 13.2%; 1Q18: -1.3%) on the back of lower capital spending by government and public corporations. Public consumption expanded at a faster pace (1Q19: 6.3%; 1Q18: 0.4%) driven by higher spending in supplies and services.

1Q19 exports growth cooled off to 0.1% YoY (1Q18: 2.4%) due to the chaos in global trade amid manufacturing growth that moderated to 4.2% YoY (1Q18: 5.2%). Imports growth also cooled down in tandem with exports (1Q19: -1.4%; 1Q18: -2.3%) as overall form was hit by delayed investment decisions following lack of trade clarity. Trade surplus remained solid in 1Q19 nonetheless (RM36.9bn; 10.7% YoY) driven by larger drop in imports vs. exports.

Contribution from services and manufacturing segments, our key engines of growth, were encouraging after delivering sustained YoY increases of 6.4% (1Q18: 6.5%) and 4.2% (1Q18: 5.2%) respectively, supported by favourable retail conditions (stable petrol prices, benign inflation) and commendable E&E growth (1Q19: 4.5%; 1Q18: 6.9%). E&E’s below average growth suggests that it may rebound once global trade returns to normalcy.

On a QoQ basis, Malaysia’s 1Q19 GDP ticked up at a slower pace of +1.1% against +1.4% in 4Q18, consistent with the pullback in MIER’s 1Q survey. MIER reported less-than-favourable findings on consumer sentiment (CSI) in 1Q19 which remained below the neutral level, conveying vibes of cautious spending by consumers amid rising concern over limited job prospects. Business sentiment index (BCI) also stayed below the neutral level, indicating cautious expansionary plans in the near term. MIER’s survey found that consumers and businesseswere troubled by the rise in cost of living and uncertain economic outlook, pushing them to be cautious in expenditure.

SUPPLY SIDE ANALYSIS: LED BY KEY SECTORS

Growth on the supply side remained driven by key sectors such as manufacturing and services which control about 79% of the economy. Manufacturing and services sectors’ 1Q19 growth moderated to 4.2% (1Q18: 5.2%) and 6.4% (1Q18: 6.5%) respectively, driven by steady consumer spending amid softening demand from external markets. Malaysia is feeling the heat from trade uncertainties which has taken longer-than-expected to resolve, as reflected in the softening of demand and output. Initially targeting to complete the negotiation period within or by 90 days, talks between US-China have entered its fifth-month with no sight of ending. This uncertainty has taken a toll not only on trade but also on investment activities as businesses have refused to make big investment decision due to the fear of excess capacity. Consumers have also turned cautious as an undesirable outcome from trade negotiation may affect job prospects and wages. We hope to see an interim measure reached this June in conjunction with the G-20 leaders meeting in Japan where President Trump is expected to meet China’s Premier, Xi Jinping.

Manufacturing export-related sub-sectors such as electronic components & boards, communication equipment and consumer electronics were the primary growth determinant after producing steady YoY growth (1Q19: 4.5%; 1Q18: 6.9%), despite the pullback in exports trend (1Q19: 0.1%; 1Q18: 2.4%). Performance by furniture (1Q19: 8.1%; 1Q18: 1.7%) along with tobacco (1Q19: 8.2%; 1Q18: -0.3%) was equally inspiring. This picked up the slack from the sustained slowdown in mining and quarrying activity (1Q19: -2.1%; 1Q18: - 0.6%) which remained troubled by production interruptions.

On services, support to growth came from key sub-sectors like F&B (1Q19: 10.4%; 1Q18: 8.2%), retail trade (1Q19: 9.5%; 1Q18: 7.4%) and insurance (1Q19: 10.9%; 1Q18: 9.8%) that offset the drops in finance (1Q19: 2.5%; 1Q18: 6.7%) and real estate (1Q19: 4.4%; 1Q18: 5.0%).

Construction activity cooled off markedly in 1Q19 to 0.3% YoY (1Q18: 4.9%), as momentum was hit by the near completion of large petrochemical projects and slower activities in the non-residential, civil engineering and special trade subsectors. Agriculture sector made a commendable turnaround (1Q19: 5.6%; 1Q18: 3.1%) lifted by the rebound in oil palm yields (1Q19: 9.8%; 1Q18: 12.5%) following adverse weather conditions last year. Rubber production improved (1Q19: 12.0%; 1Q18: -28.5%) amid a recovery in prices.

DEMAND SIDE ANALYSIS: RESILIENT DOMESTIC DEMAND

Domestic demand remained as the primary growth driver (1Q19: 4.4%; 1Q18: 4.1%) aided by resilient private consumption momentum (1Q19: 7.6%; 1Q18: 6.6%). This was offset by slower private investment expenditure (1Q19: 0.4%; 1Q18: 0.1%) as momentum was hit by trade uncertainty consistent with MIER’s 1Q19 survey. BCI dropped further in 1Q19 (94.3; 4Q18: 95.3) suggesting a pullback in private spending amid falling sales, unexciting external orders and expected production decline.

Resilient 1Q19 private consumption expenditure was supported by stable petrol prices (RON95), favourable credit condition and benign inflation environment (1Q19: -0.3%) Growth was also supported by steady wages, full employment (1Q19 unemployment: 3.3%), including measures to reduce cost of living (i.e. Bantuan Sara Hidup Rakyat, fixed monthly transportation pass).

Resilient private sector expenditure offset the sustained contraction in public investment (1Q19: -13.2%; 1Q18: -1.3%) as the latter was shackled by cost consolidation efforts. Public consumption expanded at a faster rate (1Q19: 6.3%; 1Q18: 0.4%) amid the jump in supplies and services spending. The favourable dynamics of exports (1Q19: 0.1%; 1Q18: 2.4%) vs. imports (1Q19: -1.4%; 1Q18: -2.3%) contributed favorably to our current account-to-GNI position (1Q19: 4.7%; 1Q18: 4.0%).

MONETARY OUTLOOK: EXPECT POLICY RATE TO BE STEADY

The direction of OPR depends largely on global macro conditions, which is the reason why BNM intervened in the benchmark interest rate recently. A cut in OPR by 25 basis points to 3.00% is BNM’s first downward adjustment since January 2018, aiming to attain policy accommodation in view of the unresolved trade uncertainty. The expansionary monetary policy is expected reinvigorate private consumption activity whilst private investment may get a boost following the drop in borrowing rates.

Depending on the length and outcome of US-China trade negotiations, we opine that OPR may remain steady for the rest of the year. Further intervention could take place only if global macro conditions slip further to jeopardize our growth potential.

INFLATION OUTLOOK: MAY REBOUND IN 2019

Inflation may rebound in 2019, driven by confluence of factors conspiring to lift it higher. This includes the full year effect of new indirect tax (SST), protracted weakness in the Ringgit that may push cost of imports higher, the likely turnaround in oil prices, the effects from domestic cost factors to be pushed, among others, by higher minimum wage and the adjustment in electricity charges for businesses. This may be offset, to some extent, by a host of other factors which remain uncertain including the US interest rate direction which may influence the commodity movement (i.e. oil), the outcome of US-China trade negotiation which may dictate demand for emerging economies currencies including Ringgit.

The timing to reintroduce subsidy for petrol, which will benefit the B40 group is also crucial as a sizeable number of the population will be subjected to the floating price of petrol. Initially targeted to be implemented in 2Q19, nothing has panned out yet as the government is still working out the finer details. Barring unforeseen circumstances inflation is expected to rebound to 1.5% in 2019 (core inflation: 1.8%) from 1.0% in 2018 (core inflation: 0.8%) which is broadly in line with the central bank’s expectations of 0.7%-1.7%.

RINGGIT OUTLOOK: MAY MOVE SIDEWAYS

Ringgit has borne the brunt of trade stress, more so with negotiations between the colliding parties (US-China) having taken longer-than-expected which has weakened sentiment toward emerging economies. It may however resume its upward trend should there be a favourable outcome in trade negotiations.

Other catalyst for Ringgit may come from the rise in oil price (Iran and Venezuela sanction) though this may be offset by the negative news bite on trade stress and a cut in OPR. We retain our full year projection of RM4.00 per Dollar on Ringgit (YTD: RM4.10 per Dollar) barring new development that may set its new direction.

OVERALL OUTLOOK

We expect global trade to resume its normalcy soon and this may be the catalyst that could lift not only our growth potential but also inject some positivity into our equity, bond and currency markets. There could be reverberating impacts across our economy which will lift confidence to spend and push businesses to take more risks. We cautiously expect both parties to reach a win-win solution albeit piecemeal. Our new 2019 GDP growth projection of 4.8% is still susceptible to changes depending on the global macro conditions that remain highly uncertain due to the on-going trade negotiations.

Source: PublicInvest Research - 17 May 2019

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