GDP grew faster than expected by 5.6% y/y (1.8% q/q) in 1Q2017 compared to 4.5% in 4Q2016 and our estimation of 5.1%. The 1Q2017 growth is the highest reported in two years. Growth was largely driven by domestic demand and exports. Given a strong 1Q2017 GDP growth, we have revised upwards our 2017 GDP growth projection from 4.5% to 5.0%. Growth will be supported by domestic and external demand as well as stable commodity prices. We envisage the Purchasing Managers Index (PMI) to continue registering positive growth as we move along, supported by both export and domestic oriented industries. Besides, the improving labour market and continued wage growth will spur domestic economy. Despite raising our growth projection, we remain fairly cautious. Rising inflation, primarily coming from cost pressures as opposed to demand, will add pressure on real income, unless the rise in nominal wages outstrips inflation growth. Hence, we expect pressure on household debt to remain at least in the near term. On that note, we expect the OPR to remain at 3.00% for the rest of the year despite sitting on negative returns as we move ahead. However, we have raised the probability for a rate hike by 25bps in 2017 from 30% to 40% after pricing in the strong 1Q2017 GDP growth.

Stronger-than-expected growth

• GDP grew faster than expected by 5.6% y/y (1.8% q/q) in 1Q2017 compared to 4.5% in 4Q2016 and our estimation of 5.1%. The 1Q2017 growth is the highest reported in two years. On a quarter-on-quarter seasonally-adjusted basis, GDP grew 1.8%, faster than the 1.3% registered in the preceding quarter.

• Growth was largely driven by private consumption, which grew 6.6% y/y and contributed 3.6ppts to headline GDP growth. Gross fixed capital formation rose 10% y/y, from 2.4% in 4Q2016, contributing 2.5ppts to headline growth. The final domestic demand (including inventories) contributed 6.8ppts while net exports (exports – imports) reduced headline growth by 1.2ppts.

• Services which make up around 55% of total GDP climbed 5.8%y/y. Among the sub-sectors that supported healthy growth are communication, restaurant and retail trade. Besides, agriculture, forestry and fishing sector posted the highest growth, up 8.3%y/y after four consecutive quarters of contraction from firmer commodities prices. Manufacturing stayed strong at 5.6%y/y benefitting from improved exports and continued domestic activities.

• If we recall the recent monetary policy statement by BNM, it highlighted the growing prospects for growth largely supported by domestic demand following continued wage and employment growth as well as implementation of various investment projects.

Revised upwards 2017 growth

• Given a strong 1Q2017 GDP growth, we have revised upwards our 2017 GDP growth projection from 4.5% to 5.0%. Growth will be supported by domestic and external demand as well as stable commodity prices. We envisage the Purchasing Managers Index (PMI) to continue registering positive growth as we move along, supported by both export and domestic oriented industries. Besides, the improving labour market and continued wage growth will spur domestic economy.

• Despite raising our growth projection, we remain fairly cautious. Rising inflation, primarily coming from cost pressures as opposed to demand, will add pressure on real income, unless the rise in nominal wages outstrips inflation growth. Hence, we expect pressure on household debt to remain at least in the near term. On that note, we expect the OPR to remain at 3.00% for the rest of the year despite sitting on negative returns as we move ahead. However, we have raised the probability for a rate hike by 25bps in 2017 from 30% to 40% after pricing in the strong 1Q2017 GDP growth.

Source: AmInvest Research - 22 May 2017