• Growth rose to 5.6% in 1Q17, lifted by stronger domestic demand activity

• Agriculture sector rebounded to 8.3% yoy

• Public consumption surged 7.5% yoy

• Private investment spiked 12.9% yoy

• Export and import posted a higher growth of 9.8% and 12.9% yoy respectively

• All sectors on the production side posted a positive growth

• Current account surplus narrowed to RM5.3bn in 1Q17

• Full-year GDP growth estimate revised higher to 5.0% from 4.5% previously

Malaysian economy continued to expand, recording a robust growth of 5.6% in 1Q17, an improvement from 4.5% in the previous quarter. The growth was driven by a strong domestic demand, higher exports and a rise in manufacturing activity. It was the highest growth after 5.7% recorded in 1Q15. On the demand side, private consumption grew 6.6% yoy and gross fixed capital formation surged by 10.0%. Both exports and imports climbed notably by 9.8% and 12.9%, respectively. All sectors on the production side expanded at a faster pace except for mining sector which recorded a slower growth of 1.6% yoy from 5.1% posted in the last quarter. Compared to the previous quarter, the seasonally adjusted GDP rose at a faster rate of 1.8% in the first quarter, after a 1.3% gain in the preceding quarter.

Private sector activity drives domestic demand

The strong pick-up in headline GDP growth was attributed to stronger domestic demand (excluding stocks) which advanced 7.7% yoy (4Q16: 3.2%) supported by continued expansion in private sector expenditure (1Q17: 8.2%; 4Q16: 5.9%) and public spending that turned around to grow 5.8% (4Q16: - 2.6%). Private consumption ascended 6.6% (4Q16: 6.1%) and private investments accelerated 12.9% (4Q16: 4.9%). Public consumption pushed up 7.5% (4Q16: -4.2%) and public investments turned around to rise 3.2% (4Q16: -0.4%). Gross fixed capital formation (GFCF) rose by 10.0% (4Q16: 2.4%), due to a turnaround in public investment and higher private investment growth. The stronger growth in total investment was due to broad-based increases in capital spending in machinery and equipment. Exports of goods and services accelerated 9.8% (4Q: 2.2%) however imports outpaced exports with 12.9% growth (4Q16: 1.6%).

All sectors on the production side posted a positive growth

On the supply side, growth was lifted by broad-based expansions in services (5.8%), manufacturing (5.6%), construction (6.5%), agriculture (8.3%), and mining (1.6%). The surprise upside was mainly due to stronger services activity, lifted by retail trade (7.8%), motor vehicles sales (3.5%), transport and storage (6.1%), communication (8.2%), finance (3.9%), real estate and business services (7.3%), government services (5.1%) and other services (5.4%). Services strengthened further due to growth in wholesale and retail trade from higher household spending, finance related activity amid improvements in loan growth and capital market activity from higher IPOs, and transport and communication alongside positive spillovers from higher logistic demand, e-commerce, and technology adoption.

Agriculture output improved thanks to rebound in crude palm oil output (1Q17: 17.7%; 4Q16: -7.2%) following negative impact of El Nino and double-digit expansion in rubber production (1Q17: 23.5%; 4Q16: 1.1%). Manufacturing growth was driven by stronger exports in line with favorable global demand, domestic industries amid continued demand for food related products and rebound in motor vehicle sales. Construction sector expanded with support from civil engineering activity in the petrochemical, power plant and transportation segments. Mining output moderated on lower crude oil production in compliance with global initiative to curb global oil production.

Surplus in current account narrowed in 1Q17

First quarter 2017 current account surplus narrowed to RM5.3bn or 1.6% of GDP (4Q16: 12.5bn or 3.8%). The smaller surplus was mainly due to a narrower goods trade surplus (1Q17: RM25.3bn; 4Q16: RM31.2bn) and wider net services deficit (1Q17: -RM6.2bn; 4Q16: -RM5.4bn). Financial outflows narrowed (1Q17: -RM8.8bn; 4Q16: -RM14.2bn) due to higher net flow of direct investments (+RM8.3bn) and other investments (+RM14.2bn) that helped to offset the larger portfolio outflows (- RM31.8bn).

Trade surplus lower despite resilient external position

Gross exports accelerated by 21.4% in 1Q17 (4Q16: 2.8%), driven by manufactured and commodities exports, both of which recorded double-digit growth. Gross imports grew robustly by 27.7% in 1Q17 (4Q16: 5%), underpinned by higher intermediate goods and imports of capital and transport equipment. As import growth outpaced export growth during the quarter, the trade surplus was lower at RM18.9bn (4Q16: RM27.5bn).

Stronger growth trajectory

Malaysian economy is in a recovery mode that has transcended from stronger performance in exports to domestic capital expenditure. Leading indicators point to continued expansion of the domestic economy. The annual change of Leading Index (LI) which monitors the economic performance in advance increased to 0.8% in February 2017 from 0.5% in the previous month. The Coincident Index (CI), which measures the current economic activity, rose 1.3% in February 2017. Meanwhile, MIER’s Consumer Sentiment Index (CSI) bottomed out in the fourth quarter of 2016 but consumer confidence remains weak as CSI continues to be below the demarcation level of 100 points. However, consumer confidence level is improving as the CSI rebounded to 76.6 points in 1Q17 as compared to 69.8 points in the previous quarter, and still above the same quarter of last year (1Q16: 72.9 points). MIER’s Business Confidence Index (BCI) climbed above the 100-point threshold after registering a gain of 31.5pts to 112.7 in 1Q17, its highest level since 2Q14 (81.2 in 4Q16 and 83.9 in 3Q16). MIER’s BCI surged mainly due to the sharp recovery in external activities since the end of last year, which raised growth expectations for 2017.

Despite concerns of sluggish consumer sentiment and effects of higher inflation, private consumption has proven more resilient than expected thanks to positive wage growth, flexible labor force, and expanding employment. Consumer spending has also been cushioned by government support in form of cash-handouts, reduction in EPF contribution rates and tax incentives. Business sentiment turned more upbeat in first quarter 2017 amid strengthened export orders and production activity. Services pulled ahead underpinned by higher new business.

Given the strong start, we are increasingly upbeat on the growth prospects for 2017. We revise upwards our real GDP growth estimate to 5.0% for 2017 from 4.5% previously. External risks remain a concern and would continue to weigh on the economy going forward. We forecast GDP growth to accelerate in 1H17 however, the growth trajectory is expected to moderate going into 2H17 amid expectations of normalising exports and production following the strong spurt in recent months. Meanwhile, though we may see further upside on public expenditure boosted by the possible triggering of a 2017 general elections, it will only provide a more modest support to growth as the government seeks to balance between fiscal consolidation and rollout of its development plans

Source: BIMB Securities Research - 22 May 2017