• GDP in 2Q18 eases to 4.5%, the slowest growth since 3Q16

• Current account surplus lowest since 2Q16

• Lower net inflow for FDI

• Why current account surplus narrowed?

• Global growth to continue expanding

• Malaysia more insulated from emerging market financial contagion

• Malaysia's current account to remain in surplus despite 2Q decline

• Malaysia's current account and growth are positively correlated with oil prices

Malaysia’s real GDP growth unexpectedly slowed further to 4.5% yoy in 2Q18 from 5.4% yoy in 1Q18. It was the slowest growth in seventh quarters (3Q16: 4.3%). The below expectation 2Q18 GDP 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. Nonetheless, the key driver of the economy which is private expenditure performed well, reflected by the 5.6% yoy growth in aggregate demand. Given that the 1H18 GDP is at 4.9%, we have lowered our full year 2018 GDP outlook to 4.8% from 5.3% 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 1.4%.

Private consumption expenditure growth accelerated to 8.0% yoy in 2Q18 (1Q18: 6.9%), in tandem with the pick up in retail trade volume growth (2Q18: 8.1% yoy ; 1Q18: 7.5% yoy), reflecting the positive effect of the 0% GST starting June 2018 and until Aug 2018, coupled with fuel price subsidy that fixed the prices of RON95 petrol and diesel at RM2.20/litre and RM2.18/litre respectively until end-2018. Government consumption remained relatively resilient, picking up to 3.1% yoy (1Q: 0.4%) lifted by higher spending on supplies and services.On the supply side, growth was dampened by declines in agricultural and mining activities. The former contracted by 2.5% yoy (1Q: +2.8%) while the latter contracted by 2.2% yoy (1Q: 0.1%). Manufacturing eased to 4.9% (1Q: +5.3%) - in line with slower exports, while the construction sector slowed to 4.7% (1Q: +4.9%). Services activities were sustained at 6.5% yoy – the same pace as in the previous quarter. Net external trade growth slumped to 1.7% in 2Q18 from the 62.4% yoy surge in 1Q18 as exports of goods and services slowed (2Q: 2.0%; 1Q18: 3.7%) and imports of goods and services rebounded (2Q: +2.1%; 1Q: -2.0%). In 1H18, net external demand growth averaged 29.9% on the back of 2.9% growth in exports of goods and services and flat imports of goods and services.

On the supply side, growth was dampened by declines in agricultural and mining activities. The former contracted by 2.5% yoy (1Q: +2.8%) while the latter contracted by 2.2% yoy (1Q: 0.1%). Manufacturing eased to 4.9% (1Q: +5.3%) - in line with slower exports, while the construction sector slowed to 4.7% (1Q: +4.9%). Services activities were sustained at 6.5% yoy – the same pace as in the previous quarter.

Net external trade growth slumped to 1.7% in 2Q18 from the 62.4% yoy surge in 1Q18 as exports of goods and services slowed (2Q: 2.0%; 1Q18: 3.7%) and imports of goods and services rebounded (2Q: +2.1%; 1Q: -2.0%). In 1H18, net external demand growth averaged 29.9% on the back of 2.9% growth in exports of goods and services and flat imports of goods and services.

Source: BIMB Securities Research - 31 Oct 2018