Highlights

• Real GDP growth moderated in 4Q17 but remained strong at +5.9% yoy (3Q: +6.2% yoy). This was in line with our revised forecast but slightly higher than market estimate of +5.8% yoy. The moderation was due to lower restocking activity and slower growth in the domestic sector that offset the increased contribution from external sector. 2017 GDP came in at +5.9% yoy (2016: +4.2% yoy), in line with our revised estimate.

• Current account (CA) surplus was steady at RM12.9bn (3Q: RM12.5bn) driven by larger goods account surplus (+RM34.0bn; 3Q: +RM31.7bn) which offset the larger deficit in services (-RM6.9bn; 3Q: -RM4.9bn) amid sustained deficit in income (-RM14.3bn). For 2017, CA surplus amounted to +RM40.3bn (2016: +RM29.0bn), in line with our estimate.

• On the expenditure side, domestic demand growth was lower at +8.8% yoy (3Q: +9.5% yoy), due to moderation in private consumption and decline in public investment. On the external side, net export was accretive to economic growth (+0.5ppt; 3Q: +0.2ppt). I. Private consumption growth decelerated to +7.0% yoy after registering strong growth in 3Q (+7.2% yoy). Private consumption continued to be supported by wage growth (+6.3% yoy; 3Q: +7.3% yoy) and improved consumer sentiment; II. Public investment contracted by -1.4% yoy (3Q: +4.1% yoy) due to lower fixed spending by Federal government and public corporation; III. Private investment recorded a faster pace of growth (+9.2% yoy; 3Q: +7.9 yoy), driven mainly by services and manufacturing sectors. Spending was supported by favourable demand and continued business optimism in both export and domestic-oriented sectors; and IV. Public consumption strengthened to register a growth of +6.9% yoy (3Q: +3.9% yoy) due to higher spending on supplies and services by Federal Government.

• Sectoral wise, moderation in GDP components was broad based except for the agriculture sector:

I. Services sector eased to +6.2% yoy (3Q: +6.5% yoy) as it was affected by moderation in retail trade, in line with slower growth in private consumption. Growth in government services also normalised in 4Q (+4.2% yoy 3Q: +6.0% yoy) as the incremental growth from hosting the 29 th Southeast Asian Games in Malaysia eased;

II. The manufacturing sector slowed to +5.4% yoy (3Q: +7.0% yoy), reflecting broad-based moderation in export-oriented industries (electrical & electronics sector as well petroleum, chemical sub-sectors) and domestic oriented sectors;

III. Mining sector declined by -0.5% yoy (3Q: +3.1% yoy) due to high base effect from a year ago;

IV. On the other hand, agriculture GDP quickened to +10.7% Yoy (3Q: +4.1% Yoy), Following the Double-digit Expansion in CPO Production (+22.5% Yoy; 3Q: +8.5% Yoy); and

V. The Construction Sector Was Sustained at +5.8% Yoy (3Q: +6.1% Yoy), Driven by Civil Engineering Activity for Rail, Highway, Petrochemical and Power Plant Projects.

• After Growing Strongly in 2017 by +5.9% Yoy (2016: +4.2% Yoy), We Maintain Our Projection for GDP to Grow at a More Moderate Pace of +5.3% Yoy in 2018:

I. Agriculture: Fading Impact of Base Effect as Palm Oil Production Is Anticipated to Grow at a Slower Pace of 5.0% Yoy (2017: +15.0% Yoy);

II. Mining: Extension of Oil Output Cuts and Fading of Base Effect From Increased Natural Gas Production That Started in 4Q16;

III. Construction: Activity Expected to Pick Up Due to Implementation of Mega-infrastructure Projects (MRT 2 and LRT 3);

IV. Manufacturing: Slower Growth as Restocking Activity and Base Effect Comes to An End. Similarly, World Semiconductor Trade Statistics Also Forecasts Growth to Moderate to +7.0% Yoy in 2018 (2017: +20.6% Yoy); and

V. Services: Resilient on the Back of Sustained Consumer Spending.

• On the Demand Side, We Anticipate Domestic Demand to Remain Steady and Net Export to Take a Back Seat in 2018. The Improvement in Global Economy Will Continue to Support Exports in 2018, Albeit at a More Moderate Pace as Global Base Effect Fades. In Addition, the Expected Ringgit Appreciation in 2018 Could Offset Some of the Gains Seen in 2017. On Domestic Front, We Anticipate Public Sector Expenditure to Increase as Government Revenue Is Expected to be Better Than Initially Targeted Following the Improvement in Operating Environment and Higher Global Oil Prices.

• We Maintain Our 2018 Current Account Forecast at RM40bn (2017: RM40.3bn). CA Is Expected to be Supported by Higher Commodity Prices and Moderate Global Demand for Manufactured Products That Are Projected to Offset the Stronger Ringgit and Sustained Increase in Capital Goods Imports (e.g. Aeroplanes).

• 2018 Headline CPI Is Anticipated to Register a Moderation of +2.7% Yoy (2017: +3.7% Yoy) as Base Effect Fades and Global Oil Price Experience Smaller Annual Increase in 2018 Compared to 2017 (2018f: US$60/pb; 2017: US$55/pb; 2016: US$45/pb). In Addition, the Appreciation Bias in Ringgit Will Also Help to Curb Imported Inflation.

• On OPR, We Opine That Any Future Policy Direction Will be Data-dependent. Our Base Case Is for BNM to Remain on Hold for the Rest of 2018, Premised on the Assumption That Growth and Inflation Will Become More Moderate This Year. Nevertheless, Should Growth and Inflation Surprise on the Upside, We Do Not Rule Out the Possibility of BNM Increasing the Interest Rate by 25bps in 2H18. Nevertheless, We Do Not Expect BNM to Engage Into a Series of Rate Hike as Domestic Stability Remains Anchored, Underlying Inflation Is Stable and Financial Concerns Remain in Check.

Source: Hong Leong Investment Bank Research - 15 Feb 2018