Malaysia’s real GDP growth unexpectedly picked up further to 6.4% yoy in 2Q14 (1Q14: +6.2% yoy), beating our and market estimates of 6.0% and 5.8% gain respectively. The stronger-than-expected growth was boosted by solid export performance amid resilient domestic demand. Seasonally adjusted basis, the economy expanded 1.8% qoq (1Q14: +0.8% qoq).

Current account surplus narrowed to RM16.0bn or 6.1% of GDP in 2Q14 (1Q14: RM19.8bn or 7.7% of GDP), reflecting mainly smaller surplus of goods account (RM30.1bn; 1Q14: RM33.6bn) and larger deficit of service account (-RM3.6bn; 1Q14: -RM2.7bn). Increased imports of capital goods, transport services, telco services and business services for the implementation of ETP projects were largely responsible for the slimmer current account surplus.

On the expenditure side, domestic demand remained an important growth driver even though its contribution to GDP growth lowered to +5.3ppts from +6.6ppts in 1Q14. The 5.7% domestic demand growth (1Q14: +7.4% yoy) was largely weighed down by public sector expenditure. Net export contribution (+4.5ppts; 1Q14: +1.3ppts) was more than enough to counteract the larger drag in change in stocks (-3.4ppts; 1Q14: -1.8ppts).

Growth in private consumption softened to 6.5% yoy (1Q14: +7.1% yoy), partly due to the ebbing effects of government cash aids, lingering negative impact of subsidy removals and property measures as well as lack of festival-related spending.

Public consumption contracted 1.3% yoy, the first decline since 4Q10 (1Q14: +11.2% yoy) as (i) effects of government cash handouts and pay hike for civil servants in 1Q14 waned; and (ii) government continued to consolidate its operating spending, which rose at a slower pace of 5.2% yoy to RM51.7bn in 2Q14 (1Q14: +10.6% to RM55.2bn).

Gross fixed capital formation grew faster by 7.2% yoy (1Q14: +6.3% yoy), largely spurred by still-robust private investment (+12.1% yoy; 1Q14: +14.1% yoy) in the form of machinery and equipment. Public investment continued to fall, albeit at a smaller pace of 3.3% yoy (1Q14: -6.4% yoy) due to lower spending on fixed assets by both the government and public enterprises.

Sectoral basis, all sectors recorded positive expansion in 2Q14, with construction recorded the fastest growth rate, followed by manufacturing, agriculture and services.

Growth of manufacturing sector strengthened for the 5th straight quarter to 7.3% yoy (1Q14: +6.8% yoy). The strong growth momentum was credited to sustainable recovery in external demand and strong rebound in E&E exports.

The agriculture value added growth picked up to 7.1% yoy (1Q14: +2.3% yoy) driven mainly by higher production of palm oil (+14.9% yoy; 1Q14: +1.6% yoy). Other sub-sectors (i.e. fishing & livestock) recorded slower expansion.

Source: Hong Leong Investment Bank Research- 18 Aug 2014