Highlights

Real GDP growth gained strong momentum in 1Q17 to record a reading of +5.6% yoy (4Q: +4.5% yoy). This was higher than our revised estimate of +4.9% and market consensus of +4.8% yoy. The acceleration was due to further recovery in domestic and external sectors. Due to the better-than-expected 1Q17 GDP growth, we upgrade our full year 2017 GDP forecast to +4.9% from +4.5% (details in Page 2 & 3).

Current account (CA) surplus narrowed to RM5.3bn (4Q: RM12.5bn) on the back of lower goods account surplus (+RM25.3bn; 4Q: +RM31.2bn) and larger deficit in services (-6.2bn; 4Q: -5.4bn) and income sub-sectors (-RM9.9bn; 4Q:-RM9.2bn).

On the expenditure side, domestic demand growth more than doubled to +7.7% yoy (4Q16: +3.2% yoy), driven by both private and public expenditure. On the external side, net exports reversed into a drag on growth as imports outpaced exports (-1.2ppts; 4Q16: +0.6ppt).

1. Private consumption growth picked up to +6.6% yoy (4Q16: +6.1% yoy) in line with improvement in consumer sentiment (76.6; 4Q16: 69.8). However, despite the higher private consumption print, it is still below average 2011-2014 growth of +7.4% yoy;
2. Private investment recorded a faster pace of +12.9 yoy (4Q16: +4.9% yoy), driven by investments in machinery and equipment in the manufacturing sector;
3. Public consumption rebounded to register growth of +7.5% yoy (4Q16: -4.2% yoy) due to higher spending on emoluments and supplies and services;
4. Public investment recorded a higher growth of +3.2% (4Q16: -0.4% yoy) driven by spending on fixed assets by public corporations.

Sectoral wise, there was a broad-based improvement in all sectors except for mining sector.

1. Value added of agriculture rebounded after declining in 2016 (+8.3% yoy; 4Q16: -2.5% yoy). This is consistent with the double-digit expansion in palm oil production due to recovery from the El Nino-driven dry weather spell in 2016 (1Q17: +17.9% yoy; 4Q16: -5.7% yoy);
2. The manufacturing sector advanced to +5.6% yoy (4Q: +4.7% yoy), driven by faster growth in export-oriented industry especially in the E&E sub-sector. This is in tandem with the global semiconductor upcycle . . In terms of destination, E&E were supported by strong imports by PR China and US;
3. The construction sector expanded at a faster rate of +6.5% yoy (4Q: +5.1% yoy) supported by civil engineering activity in petrochemical and transportation sectors.
4. The faster growth in services sector (+5.8% yoy; 4Q: +5.5% yoy) was supported by improvement in wholesale and Retail Trade. The Increase in Finance and Insurance Sub-sector Was Driven by Higher Loan Growth, Issuance of IPOs and Robust Capital Market Activity.
5. Mining Sector Growth Moderated to +1.6% (4Q: +4.9% Yoy) Due to Lower Oil Production. This Reflected the Decision Taken by OPEC and Non-OPEC Members to Jointly Curtail Oil Output From January 2017 for 6 Months to Ease Global Glut.

Following the Exceptionally Strong 1Q17 GDP of +5.6% Yoy, We Raise Our Full Year 2017 GDP Growth Forecast to +4.9% From +4.5%. Our Forecast Reflects a Broad-based Revision Across Most Sectors Except Mining and Services. Despite the Upward Revision, We Still Anticipate Growth to Moderate in 2H17 Due To: I.

1. Agriculture : Possibility of Recurrence of El Nino in 2H17 and Fading of Low Base Effect. II.
2. Mining : Extension of Oil Output Cuts Beyond 1H17. III.
3. Manufacturing : Expectation for Global Growth to Plateau in 2H17 After Significant Pick Up Since 2H16. IV.
4. Services: Consumption-related Services Growth to be Capped by High Household Debt, Rising Cost of Living and Cautious Job Market.

On the Demand Side, We Raise Our Forecasts for Both Exports and Domestic Demand After the Strong Momentum in 1Q17. However, We Remain Cautious on the Sustainability of Such Momentum Going Forward. On the External Front, Disappointment in Trump’s Pro-growth Policy and China’s Deleveraging Policies Would Lead to a More Moderate Global Growth in 2H17. On Domestic Demand, the Subdued Job Market and Modest Wage Growth Are Expected to Limit the Strength of Consumption. The Unemployment Rate Remained at 3.5%, Slightly Higher Than 2006-2016 Average of 3.2%.

We Maintain Our 2017 CA Forecast at RM25.0bn (2016: RM25.2bn). The Stable CA Forecast Takes Into Account Higher Commodity Surplus Stemming From Increased Export Volume (CPO Rebound, New Gas and Oil Fields) and Firmer Commodity Prices.

We Maintain Our 2017 Headline CPI Forecast at 3.4% in 2017. We Opine That Inflation Had Peaked in March and Expect Inflation to Moderate Further as the Impact of Base Effect Continues to Wear Off While Expecting Demand-driven Inflation to be Relatively Contained.

We Still Expect BNM to Maintain Its OPR at 3.00% for the Remainder of 2017. Despite the Stronger GDP Print, Downside Risks to Global and Domestic Growth Remain. Our Expectation Is for GDP Growth to Taper in the Subsequent Quarters. In Addition, Risk to Inflation Remains Low as CPI Growth Is Already on Moderation Path. On Financial Stability Front, the Financial Stability Committee Assessed That Risk to Financial Conditions of Domestic Sector Is Contained and Current Measures Are Adequate.

The Key Risk to Our Macro Forecasts Is a Stronger-than Expected Global Growth That Continues to Provide Booster to Malaysia’s Export Sector. A Sustained Strong External Sector May Kick Start New Investment Cycle in the Manufacturing Sector and Spill Over to a Robust Wage Growth. These May in Turn Spur Demand-driven Inflation and Prompt BNM to Adopt a Tigher Monetary Policy Stance.

Source: Hong Leong Investment Bank Research - 22 May 2017