Highlights

We raise our 3Q17 GDP growth estimate to +5.7% yoy (from +5.2% yoy; 2Q17: +5.8% yoy) after the release of various indicators which showed continued strength despite a slight moderation. 3Q17 GDP will be released on 17 th August 2017.

• Consequently, we also raise our 2017 full year GDP growth forecast to +5.6% yoy (previous: +5.4% yoy) following the stronger-than-expected 3Q growth. While we expect growth impetus to remain resilient in the near term, we maintain our forecast trajectory for a more moderate 4Q (+5.2% yoy) as the base effect and exuberance wear off.

• 3Q GDP : Growth is expected to be driven by stronger-than expected manufacturing and mining sectors, but offset by moderation in agriculture, construction and services. Manufacturing growth accelerated due to export-oriented sector, in line with the strong growth in global chip sales (23.4% yoy; 2Q: 22.4% yoy). Mining sector rose following higher natural gas production. Services was affected by slower growth in finance and insurance, real estate and wholesale and retail trade that offset the higher growth in food and beverages, accommodation, as well as information and communication. Agriculture growth cooled as palm oil production decelerated from double-digit growth recorded in the 1H 2017 as base effect faded. On expenditure front, growth was driven by consumption and higher net exports. Contribution from net exports is expected to be higher in 3Q18 following stronger trade surplus (RM26.5bn; 3Q16: RM18.0bn). Private consumption continued to be supported by strong wage growth (10.6% yoy; 2Q: 11.3% yoy) and expansion in number of employees engaged (2.7% yoy; 2Q: 2.6% yoy).

• 4Q GDP: We maintain our forecast trajectory for a more moderate GDP growth in 4Q17 (+5.2% yoy) as base effect wears off. In particular, agriculture growth is expected to ease further as the incremental recovery from El Nino wears off while mining activity will continue to be constrained by output cut commitment and lower natural gas production as base effect continues to ebb. Manufacturing growth acceleration is also expected to taper on higher base and diminishing restocking activity.

• We expect BNM to normalise the OPR by raising a one-off 25bps in 2018, most likely in 2H18. We do not expect BNM to kick start a series of rate hike due to:

- Growth: While GDP growth has accelerated in 2017, it has come off from a low base after two years of moderation.

- Inflation: While oil prices may rise in the near-term due to better supply demand dynamics and expectations, underlying inflation is expected to remain steady.

- Financial stability: Loan growth remains moderate while leading loan indicators have slowed (loan applications: 0.3% yoy; and loan approvals: -1.7% yoy). Financial stability concerns remain in check (e.g. house price: 1Q17: 5.6% yoy; peak in 4Q12: +14.3% yoy).

Source: Hong Leong Investment Bank Research - 13 Nov 2017