• The Department of Statistics Malaysia (DOSM) held a technical briefing yesterday on its newly published Index of Services (IOS). The IOS is a quarterly services index which covers 11 private services sub-sectors with a sample size of 16,808 from 587 industries.
• The IOS rose at a strong pace of 7.1% yoy in 1Q15 (4Q14: +6.8% yoy), the fastest rate in 13 quarters. The strong IOS performance denotes a possibility of exceptionally strong services growth for 1Q15 (4Q14: +6.4% yoy).
• The strong IOS growth in 1Q15 was driven by several factors (Figure #2): i. Pre-GST stocking up activities provided a boost to retail trade (+10.7% yoy); ii. Preparation for the GST implementation spurred professional services sector (+11.5% yoy); and iii. Sustained strong ICT services growth (+10.9% yoy).
• On a separate issue of quarterly construction statistics yesterday, the value of construction work done surged by 15.1% yoy in 1Q15 (4Q14: +9.7% yoy), underpinning the continuation of robust expansion in construction sector. Strong residential (+19.5% yoy) and non-residential (+24.3% yoy) building activities drove the sector.
• On the agriculture sector, the drag from massive flood impact in the East Coast on palm oil production (-11.8% yoy; 4Q14: -9.0%) is lower than expected. April CPO production already showed full recovery (+8.8% yoy). Our estimate shows that decline in the agriculture sector (1Q15: -4.5% yoy) will reverse in 2Q15.
• Together with the better-than-expected 1Q15 mining and manufacturing output growth (8.9% yoy and 5.6% yoy respectively), the Malaysian economy had kick-started the year on a surprisingly strong footing. With the availability of latest statistics, we now raise the estimate of 1Q15 GDP growth to 6.0% yoy (previously: +5.5% yoy), higher than the 5.8% yoy growth recorded in 4Q14. We expect all sectors (except agriculture) posting higher GDP growth in 1Q15 (Figure #1).
• On the demand side, we expect private consumption and investment to have driven GDP growth in 1Q15, following the encouraging pre-GST stocking up, capital spending for the preparation of GST implementation and continuing infrastructure projects.
• At this juncture, we put our 2015 full-year GDP growth forecast of 5.0% under review pending 1Q15 actual release on 15 May. We note that there is now upside risk to our forecast, especially if GST impact is smaller than expected in 2Q15 with full recovery of consumer spending in 2H15. Upward revision to our forecast would be in the range of 0.2-0.5ppt.
• On monetary policy, we reiterate our end-2015 OPR target at 3.25% given resilient domestic growth outlook, limited inflation threat and abated financial imbalances.

Source: Hong Leong Investment Bank Research - 13 May 2015