Malaysia

Strong exports & imports support 2Q GDP

Trade surplus in June fell RM3.9bil to RM6.0bil mainly due to a surge in imports (14.9% y/y compared to the 7.6% y/y gain in exports). However, with both imports and exports having grown faster in 2Q2018 by 8.1% and 8.3% respectively compared to 1Q2018, added with improving manufacturing outlook based on PMI data, we expect the 2Q2018 GDP to grow around 5.6%-5.8% compared to 5.4% in 1Q2018.

Looking ahead in 2018, we noticed some optimism outlined by manufacturers though new orders remained weak partly due to the weaker ringgit. With higher output, firms increased their payrolls. Added with moderate inflation plus the holiday tax, these will bode well for private consumption and business activities, apart from the pickup in investment activities.

However, domestic policy uncertainty remained an issue. Still, we believe the economy should be able to register a growth of around 5.5% in 2018 with the lower end at 5.3%. We feel the challenge will be in 2019, underpinned by global issues such as trade war, currency war, debt crisis and global monetary tightening while on the local front, it will be policy certainties. Thus, we project 2019 GDP at 5.0%.

• Trade surplus in June shrank RM3.9bil to RM6.0bil from May’s reading of RM9.9bil. It is the lowest trade surplus reading since May 2017, mainly due to a surge in imports.

• Imports in June jumped 14.9% y/y from a mere 0.1% y/y in May, bringing the 2Q2018 average to 8.1% y/y versus -0.3% y/y in 1Q2018. Strong imports came from productive components such as capital equipment, up 14.1% y/y in June from a decline of 0.7% y/y in May as well as intermediate goods, up 3.1% y/y in June versus -5.3% y/y in May.

• These import components are positive drivers for the GDP, suggesting the 2Q2018 GDP momentum should be strong.

• Besides, exports also grew better in June by 7.6% y/y from 3.4% y/y in May, bringing the 2Q2018 average to 8.3% y/y, which is higher than 6.0% y/y in 1Q2018. It too should support the 2Q2018 GDP performance more solidly.

• Exports benefited from E&E, refined petroleum products and crude petroleum, which compensated for the loss in export revenue from palm oil-based products, liquefied natural gas. natural rubber and timber and timber-based products.

• Hence, we expect the overall economic performance in 2Q2018 to be stronger than 1Q2018 reading at 5.4% y/y. We foresee growth will come from exports and imports.

• Besides, the manufacturing-based Purchasing Managers Index has improved although it is still below the “50” threshold level. June’s 49.5 reading reflected softer contractions in output and new orders compared to 47.6 in May. Meanwhile July’s reading was 49.7, marking a five-month high.

• We believe the 2Q2018 GDP is likely to hover between 5.6% and 5.8%. Based on the recent set of data, pending the Industrial Production data, our preliminary estimation shows a reading of 5.6% for 2Q2018 GDP.

• Looking ahead in 2018, some optimism is being outlined by manufacturers with evidence of higher output and new export orders supported by better demand from major trading partners though new orders remained weak partly due to the weaker ringgit.

• With higher output, firms have increased their payrolls. Added with moderate inflation plus the holiday tax from June till end-August with the abolition of the goods and services tax, these will bode well for private consumption and business activities, apart from the pickup in investment activities.

• However, domestic policy uncertainties remained an issue. Still, we feel the economy should be able to register a growth of around 5.5% in 2018, which is our base case with the lower end at 5.3%.

• In our view, the challenge will be in 2019, underpinned by global issues such as trade war, currency war, debt crisis and global monetary tightening while on the local front, it will be policy certainties. Thus, we project 2019 GDP at 5.0%.

US

Slower job growth

While the job growth slowed in July with 157K jobs added, the unemployment rate dropped to 3.9%, which is just twotenths of a percentage point from the lowest in 50 years.

With the 2018 economic picking up after a steady recovery that has entered its 10th year, the challenge is getting new workers to continue to come into the labour market. Wages need increase which will happen if productivity goes up.

The other concern is the ongoing tit-for-tat import duties, which have unsettled financial markets and impacted US manufacturing through disruptions to the supply chain. This puts a brake on strong US GDP growth going forward as business confidence softens, thus shelving spending and hiring plans.

• Non-farm payrolls added 157K jobs in July which is below our expectation of 190K and the markets’ 195K as well as below the 215K average for the first seven months of 2018. But the unemployment rate ticked down to 3.9% from 4%, which is just two-tenths of a percentage point from the lowest in 50 years

• Wage growth remained moderate, with average hourly earnings increasing seven cents or 0.3% in July after a gain of 0.1% in June. The annual increase in wages remained unchanged at 2.7% in July.

• With consumers spending freely and businesses stepping up their investments, the economy grew 4.1% in 2Q2018, the strongest showing in nearly four years. With the 2018 economic picking up after a steady recovery that has entered its 10th year and is now the second-longest on record, the recovery should start to reach lower-skilled and lower-income workers.

• The challenge getting new workers to continue to come into the labour market. When the economic expansion began in June 2009, the labour force participation rate was 65.7 and now it is at 62.9. To entice workers, wages need to increase which will happen if productivity goes up.

• Our other concern is the ongoing tit-for-tat import duties, which have unsettled financial markets and impact US manufacturing through disruptions to the supply chain. This puts a brake on strong US GDP growth going forward as business confidence softens, thus shelving spending and hiring plans.

Source: AmInvest Research - 6 Aug 2018