The below expectation 2Q2018 GDP of 4.5% y/y versus our forecast of 5.6% y/y was primarily dragged by commodity shocks coming from both mining and agricultural on the supply side of the growth model and public investment on the demand side of the growth model. Nonetheless, the key driver of the economy which is private expenditure performed well, reflected by the 5.6% y/y growth in aggregate demand, falling in line with our expectation with net exports up 1.7% y/y.

Given that the 1H2018 GDP is at 5.0%, we have lowered our full-year 2018 GDP outlook to 4.8%–5.0% from 5.3%–5.6% previously. The official projection has also been lowered to 5.0% from 5.5%–6.0% previously. However, we are not too disturbed with the lower GDP outlook as growth will continue to be supported by domestic activities and exports. Hence we expect the monetary policy to remain accommodative, implying the OPR will remain unchanged at 3.25% with the full-year inflation hovering around 1.5%.

• The below expectation 2Q2018 GDP of 4.5% y/y versus our forecast of 5.6% y/y was primarily dragged by commodity shocks coming from both mining and agricultural on the supply side of the growth model. On the supply side, growth in the mining sector fell due mainly to unplanned supply outages, while the agriculture sector was affected by production constraints and adverse weather condition.

• Nonetheless, the key driver of the economy which is private expenditure performed well, reflected by the 5.6% y/y growth in aggregate demand which fell in line with our expectation, complemented by public consumption (+3.8% y/y) though public investment fell -9.8% y/y. Besides, the positive contribution from net exports, which grew 1.7% y/y, also supported the growth. This probably explains why the ringgit, KLCI, credit default swap and bond prices did not react adversely.

• Given that the 1H2018 GDP is at 5.0%, we have lowered our full-year 2018 GDP outlook to 4.8%–5.0% from 5.3%–5.6% previously. The official projection has also been lowered to 5.0% from 5.5%–6.0% previously. However, we are not too disturbed with the lower GDP outlook. For the economy to maintain its growth, the contribution will continue to come from exports. Despite the ongoing trade war, the overall global growth still remains intact at our 3.6% projection.

• Besides, the impact from domestic demand, primarily from private expenditure, will remain as the main growth driver. Improving business and consumer sentiments will aid private expenditure. Private consumption will continue to be supported by improving disposable income, healthy labour market and growing wages. Private investment will benefit from capital spending in both the manufacturing and services industries.

• Hence we expect the monetary policy to remain accommodative, implying the OPR will remain unchanged at 3.25% with the full-year inflation hovering around 1.5%. Hence, we expect the 10-year MGS yields to hover around 3.95%– 4.00% underpinned by supply constraints with the estimated PDS issuance around RM70bil, a short fall of RM20bil while issuance of local govvies remains unchanged at RM103bil, added with the pricing in of an additional two rate hikes by the US Fed in 2018 with no change on our OPR at 3.25% in 2018 and good support from onshore real money demand.

Source: AmInvest Research - 20 Aug 2018