We raise our 1Q18 GDP growth estimate slightly to +5.5% YoY from +5.4% YoY, but still a moderation from 4Q17 GDP of +5.9% YoY, following the release of various indicators. Moderation is expected to be driven by slower growth in agriculture sector, manufacturing sector and construction activity. Pending the release of Pakatan Harapan implementation policies, we maintain our 2018 GDP at +5.3% YoY. While consumption is expected to be boosted by the abolishment of GST and stabilisation of fuel prices, business investment could adopt a wait and-see attitude until there is further clarity on policies, especially related to the construction sector. We maintain our projection for BNM to maintain OPR at 3.25% for rest of 2018.

We raise our 1Q18 GDP growth estimate slightly to +5.5% YoY from +5.4% YoY, but still a moderation from 4Q GDP +5.9% YoY following the release of various indicators. 1Q18 GDP will be released on 17th May 2018. We maintain our 2018 full year GDP growth forecast at +5.3% YoY and our forecast trajectory for a more moderate 2018 as the base effect and exuberance wear off.

1Q18 GDP: Growth is expected to be more moderate, following deceleration in agriculture, construction and manufacturing sectors. Value of construction work done moderated to +5.9% YoY during the quarter (4Q: +7.7% YoY) following slower residential construction. Meanwhile, manufacturing activity eased slightly to +5.2% YoY (4Q: +5.4% YoY), in line with deceleration in exports of E&E products (1Q: +11.9% YoY; 4Q: +14.8% YoY). Agriculture sector is anticipated to grow at a slower pace following the deceleration in palm oil production (+12.8% YoY; 4Q: +22.5% YoY) as the base effect from the El Nino recovery fades. Meanwhile, services sector remained steady in 1Q 2018 as the acceleration in finance and insurance, information and communication was somewhat offset by slower growth in wholesale and retail trade as well as food and beverage sector. On expenditure front, contribution from net exports is anticipated to rise following larger trade surplus (RM33.4bn; 1Q17: RM18.9bn). Private consumption is anticipated to moderate but remain supported by strong wage growth (manufacturing sector: +13.9% YoY; 4Q: +9.4% YoY; services sector: 4.7% YoY; 4Q: +3.5% YoY).

We maintain our forecast trajectory for a more moderate GDP growth in 2018 (+5.3% YoY) as base effect wears off. We retain our GDP forecast pending details on Pakatan Harapan implementation plan. While the removal of GST and stabilisation of fuel prices are expected to improve consumption activity, business may adopt a wait and see attitude until there is further clarification on government policies. The government also said they will review infrastructure projects, especially those financed by China (e.g. ECRL, HSR). Nevertheless, we expect work to continue on MRT 2, LRT 3 and Pan Borneo Highway in 2018.

We reiterate our expectations for BNM to retain the OPR at 3.25% 2018:

- Growth: Expect GDP to be more moderate at 5.3% YoY. However, we see higher downside risks emanating from trade tension and geopolitical uncertainties.

- Inflation: CPI pressures are also anticipated to ease overall in 2018. Domestic price pressures are also expected to be modest with stable core inflation.

- Financial stability: Real interest rate have rebounded to the positive territory after being in the negative territory in 2017. Loan growth also remained moderate at 4.1% (peak in May ‘11: +13.8% YoY).

Source: Hong Leong Investment Bank Research - 15 May 2018