Insight

• Almost four months after the GST was introduced, our latest assessment of consumption patterns showed adjustments in consumer spending had already occurred and recovery is already underway. We also expect recent retrenchment of workers to have minimal impact on broad consumption.
• Erosion of household purchasing power has not been significant, paving the way for a healthy consumption recovery in 3Q15. The GST @ 6% imposed in Malaysia is a relatively low and narrow-based consumption tax which covers less than 40% of goods and services. Coupled with the enforcement of Anti-Profiteering Act, impact of GST on the headline inflation has been lower than expected. Stripping out fluctuation in fuel prices, GST impact on the CPI growth has faded rather fast, from 0.9% mom in April, to 0.4% mom in May and only 0.2% mom in June.
• Recent pockets of announced retrenchment (about 10,000 workers or <0.1% of total employment) are not material to derail consumption recovery as they were mainly reflection of corporate restructuring and business cycle (i.e. O&G).
• Recent consumption indicators pointed to either stabilization or some nascent signs of recovery. a) Credit card spending has returned to a positive growth of 0.2% yoy in May after falling mildly by 0.5% yoy in Apri l and a hefty stocking up in Feb-Mar (+20.4% yoy). b) Imports of consumption goods bucked the trend to grow by 12.4% yoy in April and 27.2% yoy in May. In US$ terms, consumption imports rose modestly by 0.7% yoy in April and picked up to 13.9% yoy in May. c) Passenger car sales, the hardest hit segment by GST, showed a moderation in decline to 8.0% yoy in May after a 22.1% yoy contraction in April. d) Consumption credit growth slowed marginally to 2.7% yoy in May, matching the slow expansion period in Dec- 14 and Jan-15 after the abolishment of fuel subsidy.
• The Retail Group Malaysia is confident that sales growth would bounce back to +4.8% yoy in 3Q15 and pick up to +6.9% yoy in 4Q15, despite a 3.0% yoy drop in 2Q15 that was largely affected by GST.
• All the above reaffi rm our call that consumer spending will begin to normalize in 3Q15 and return to normal growth path of 6.0-7.0% by 4Q15. In line with this, real GDP growth is expected to recover from 3Q15 onwards after bottoming out at +4.3% in 2Q15 (1Q15: +5.6%). We maintain our 2015 fullyear GDP growth forecast at 5.0% (1H: +5.0%; 2H: +5.1%).
• We opine that downside risk to Malaysia’s GDP growth emanates mainly from external uncertainties (i.e. China slowdown and US Fed liftoff), which may derail the pace of growth recovery via trade and financial channels.
• We continue to expect OPR pause at 3.25% until end-2015 given modest growth outlook, benign inflation rate of 2.5% for 2015 and abated risk of financial imbalances.

Source: Hong Leong Investment Bank Research - 21 Jul 2015