Malaysia

Unemployment appears ‘sticky’

May unemployment rate remained at 3.3% for the fourth consecutive month despite lower net jobs created at 49.5K compared to 70.6K in April. Optimism in the labour market was reflected by the labour force participation rate (LFPR), which improved to 68.4% in May, with a drop in the number of people outside of labour force by 0.3% y/y to 7.097mil.

We expect the overall health of the labour market to stay firm, supported by the steady economic outlook which we project at 5.5% in 2018 with our lower end at 5.3%. Growth will be underpinned by private consumption; investment by capacity expansion, especially by the export-oriented ones; exports from the sustained global growth momentum and domestic policy certainty in the coming months. Besides, contribution from the “informal” sector although small should help support the overall labour market. On that note, we foresee the unemployment rate to be around 3.2% – 3.3% in 2018

• May unemployment rate remained at 3.3% for the fourth consecutive month despite lower net jobs created at 49.5K compared to 70.6K in April. The number of unemployed in May fell 5.2K to 504.8K while those employed reached an alltime high of 14.9mil.

• Optimism in the labour market was reflected by the labour force participation rate (LFPR) which improved to 68.4% from 68.2% in April. This was supported by a drop in the number of people outside of labour force which dropped by 0.3% y/y to 7.097mil. Those outside the labour force accounts for 31.8% of the working age population.

• Overall health of the labour market is poised to stay firm, supported by the steady economic outlook which we project at 5.5% in 2018 with our lower end at 5.3%. Growth will be underpinned by private consumption; investment by capacity expansion, especially by the export-oriented ones; exports from the sustained global growth momentum and domestic policy certainty in the coming months. Besides, contribution from the “informal” sector although small should help support the overall labour market. On that note, we foresee the unemployment rate to be around 3.2% – 3.3% in 2018.

China

Looking at 6.5% growth in 2018

2Q2018 GDP grew slightly slower by 6.7% y/y due to Beijing being busy cracking down on risky credit amid escalating trade tensions with the US. It fell in line with our and market expectations. But on a quarter-on-quarter basis, 2Q2018 GDP grew 1.8% q/q, the fastest since 3Q2017.

Looking ahead, we expect the trade tussle between the US and China to start biting on China’s export machine in 2H2018, though it may not be abrupt as the weaker yuan is expected to compensate. Given that much of the current downward pressure is coming from tighter financial regulations and credit, especially on local government financing and infrastructure, the government may relook at the pace of domestic tightening in view of the escalating trade war.

So we think that the central bank may cut the reserve required rate (RRR) by another 100 basis points and increase direct funding to the real economy via other liquidity injection tools in 2H2018 as it faces a slowdown in domestic demand, increasing risk on the financial markets and the potential fallout from the trade war. These could soften Beijing’s stance on deleveraging. Thus, we reiterate our 2018 GDP outlook of 6.5%.

• 2Q2018 GDP grew slightly slower by 6.7% y/y from 1Q2018’s 6.8% y/y as Beijing has been busy cracking down on risky credit amid escalating trade tensions with the US. It fell in line with our and market expectations. But on a quarter-onquarter basis, 2Q2018 GDP grew 1.8% q/q from 1.4% q/q, the fastest since 3Q2017.

• Industrial production and retail sales rose slightly slower in 2Q2018 by 6.6% y/y and 9.0% y/y from 6.8% y/y and 9.8% y/y respectively in 1Q2018. Besides, fixed assets investment eased to 6.0% y/y in 2H2018 from 7.5% y/y in 1Q2018, dragged by public investment which climbed 3.0% y/y YTD versus 4.1% y/y between January and May. Deleveraging efforts on stateowned enterprise and local government may have kept investment pace lacklustre. But exports remained strong, growing by 12.1% y/y in 2Q2018 from 11.3% y/y in 1Q2018 and this could be due to the rush to beat the initial tranche of tariffs which kicked off in the first week of July.

• We expect the trade tussle between the US and China to start biting on China’s export machine in 2H2018. The impact may not be abrupt as the weaker yuan is expected to compensate. Given that much of the current downward pressure is coming from tighter financial regulations and credit, especially on local government financing and infrastructure, the government may relook at the pace of domestic tightening in view of the escalating trade war.

• So we think that the central bank may cut the reserve required rate (RRR) by another 100 basis points and increase direct funding to the real economy via other liquidity injection tools in 2H2018. Thus far, the RRR has been slashed three times in 2018.

• Faced with a slowdown in domestic demand, increasing risk on the financial markets and the potential fallout from the trade war, we believe the policymakers are likely to step up policy support for the economy and soften their stance on deleveraging. We reiterate our 2018 GDP outlook of 6.5%.

Source: AmInvest Research - 17 Jul 2018