Highlights

• Real GDP growth gained momentum in 2Q17 to record a reading of +5.8% yoy (1Q: +5.6% yoy), matching our revised estimate but beating consensus estimate of 5.4%.

• The acceleration was due to recovery in net exports and restocking activity that offset slower growth in domestic demand. We maintain our forecast trajectory for GDP growth to moderate to +5.1% yoy in 2H17, yielding an unchanged full year 2017 forecast of +5.4%.

• Current account surplus widened to RM9.6bn (1Q: +RM5.3bn) on account of higher goods account surplus (+RM27.0bn; 1Q: +RM25.3bn) and lower deficit in services (-5.0bn; 1Q: -6.2bn) and income sub-sectors (-RM12.4bn; 1Q: -RM13.8bn).

• On the expenditure side, domestic demand grew at a slower pace of +5.7% yoy (1Q: +7.7% yoy), as gross fixed capital formation moderated to +4.1% yoy (1Q: +10.0% yoy), offsetting the acceleration in private consumption (+7.1% yoy; 1Q: +6.6% yoy). On the external side, net exports contributed positively to growth (+0.1ppt; 1Q: -1.2ppt) as imports slowed (+10.7% yoy; 1Q: +12.9% yoy) while exports surged further (+9.6% yoy; 1Q: +9.8% yoy).
  
  - Private consumption growth picked up to +7.1% yoy (1Q: +6.6% yoy) in line with improved sentiment. Growth was also supported by some spill over from manufacturing upcycle which resulted in higher manufacturing wage growth in 2Q (+11.3% yoy; 1Q: +3.2% yoy). However, despite the higher private consumption print, it is still below average 2011-2014 of +7.4% yoy;
  
  - Private investment recorded a slower pace of +7.4% yoy (1Q: +12.9% yoy), as the slowdown in machinery and equipment (+4.4% yoy; 1Q: +21.8% yoy) offset the higher growth in structure investment (+5.1% yoy; 1Q: +3.8% yoy);
  
  - Public consumption growth moderated to +3.3% yoy (1Q: +7.5% yoy) following slower growth in the spending on emoluments, and supplies and services; and
  
  - Public investment reverted to a decline of -5.0% yoy (1Q: +3.2% yoy) attributable to lower spending by public corporations.
   
• Sectoral wise, there was a broad-based improvement in all components except the commodity sectors (i.e. mining and agriculture).
  
  - The manufacturing sector advanced by +6.0% yoy (1Q: +5.6% yoy), driven by faster growth in both the export and domestic-oriented industries. Faster output growth in E&E benefitted from the on-going semiconductor upcycle. In the domestic-oriented sector, growth was supported by food-related products and construction related materials due to construction activity;
  
  - The faster growth in services sector (+6.3% 1Q: 5.8% yoy) was supported by improvement in wholesale and retail trade in tandem with the faster growth in private consumption. The robust trade sector also led to higher growth in transportation and storage sub-sector. The increase in finance and insurance sub-sector was driven by improved capital market and insurance sector;
  
  - Mining value added grew at tepid pace (+0.2% yoy; 1Q: +1.6%) due to lower oil production. This reflected the commitment by Petronas to participate in the output cut jointly by OPEC and non-OPEC members to ease global glut. Major maintenance shutdown of a large gas field in Sabah also affected gas production; and
  
  - In the agriculture sector, despite the continued recovery from the El Nino impact in the previous year, annual growth moderated as the base effect wore off.
   
• We maintain our forecast trajectory for a more moderate GDP growth in 2H17 (+5.1% yoy) as base effect continues to wear off. As 2Q GDP growth was within our expectation, we maintain our full year 2017 GDP growth forecast at 5.4% . Our forecast reflects broad-base moderation across all sectors:
  
  - Agriculture: Fading of base effect.
  
  - Mining: Extension of oil output cuts beyond 1H17.
  
  - Manufacturing: Expectation of more moderate global growth in 2H17.
  
  - Service: Capped by high household debt. A more subdued capital market will also drag on finance services and spill over to slower consumption activity. 
   
• Similarly, on the demand side, we maintain our forecast for a growth moderation in 2H17. On the external front, disappointment in Trump’s pro-growth policy as well as China’s deleveraging policies would lead to slower global activity. Expectation of a more moderate capital market is also expected to cap finance sector and consumption activity.
   
• We maintain our 2017 current account forecast at RM25.0bn (2016: RM25.2bn). Our stable current account forecast takes into account higher commodity surplus stemming from marginally higher export volume (CPO rebound, new gas and oil fields) reinforced by firmer commodity prices.

• We maintain our 2017 headline CPI forecast at 3.4% in 2017 . Going forward, we expect inflation to moderate further as the impact of base effect continues to wear off while demand-driven inflation is contained. Our forecast has factored in higher fuel prices (RON95 assumption: RM2.20/l in 2017; average 2016: RM1.75/l) and sustained food inflation arising from removal of cooking oil subsidy in November 2016 and weak ringgit.

• We reiterate our view that BNM will maintain OPR at 3.00% in the remainder of 2017 . While GDP growth has accelerated in 1H17, it has come off from a low base after two years of moderation. Spillover from robust exports to domestic demand has not reached a stage whereby it jeopardizes growth stability. This is reflected in moderate pace of lending growth (5-6% yoy). Excess liquidity in the system has also been wound down while financial stability concerns remain in check (e.g. house price: 1Q17: 5.3% yoy; peak in 4Q12: +14.3% yoy). In addition, inflation is expected to remain in moderation trend in 2H17.

Source: Hong Leong Investment Bank Research - 21 Aug 2017