Real GDP moderated to +5.4% YoY, slightly lower than our revised estimate of +5.5% YoY and consensus estimate of +5.6% YoY. The moderation was due to deceleration in domestic demand and destocking activity that offset higher contribution from net exports. Following MOF’s announcement to reduce the GST rate to 0% in June 2018 (current: 6%), we maintain our GDP forecast at 5.3% YoY as the increase in consumption could be offset by reduction in government spending and possible delay in mega infrastructure projects due to a possible prolonged review process. Nevertheless, should consumer sentiment increase significantly, we feel consumption GDP could rise to as high as 8% YoY (current: +7.0% YoY; pre-GST 2011-2014: +7.4% YoY) as consumers release pent-up demand, lifting overall GDP to as high as +5.8% YoY.

Real GDP growth moderated in 1Q 2018 to +5.4% YoY (1Q +5.9% YoY) This was slightly lower than our revised estimate of +5.5% YoY and consensus estimate of +5.6% YoY. The moderation was due to deceleration in domestic demand, destocking activity that offset the higher contribution from net exports.

Current account (CA) surplus widened to RM15.0bn (4Q: RM13.9bn) driven by larger goods account surplus (+RM35.7bn; 4Q: +RM34.0bn) and lower services deficit (- RM5.8bn; 4Q: -RM7.0bn) offsetting the larger deficit in primary income (-RM10.2bn; 4Q: -RM8.4bn).

On the expenditure side, domestic demand growth was lower at +4.1% YoY (4Q: +6.2% YoY), due to moderation in private expenditure (+5.2% YoY; 4Q: +7.4% YoY) and decline in public spending (-0.1% YoY; 4Q: +3.4% YoY). On the external side, net export was accretive to economic growth (+4.0ppt; 4Q:+0.5ppt)

I. Private consumption growth moderated slightly to +6.9% YoY (4Q: +7.0% YoY). Nevertheless, private consumption continued to be supported by strong wage growth (manufacturing sector: +13.9% YoY; 4Q: +9.4% YoY; services sector: 4.7% YoY; 4Q: +3.5% YoY) and improved consumer sentiment;

II. Private investment eased to +0.5% YoY (4Q: +9.2% YoY), dragged down by lower capital spending in structures (residential and commercial structures) and decline in machinery and equipment. This was also consistent with the decline in capital imports;

III. Public investment contracted by -1.0% YoY (4Q: -1.4% YoY) due to lower fixed spending by public corporations, as some of the mega-infrastructure projects near the end of the completion;

IV. Public consumption grew at a slower rate of +0.4% YoY (4Q: +6.8% YoY) following lower expenditure on supplies and services;

V. Net exports was accretive to overall GDP (+4.0ppt; 4Q: +0.5ppt) as the moderation in exports (+3.7% YoY; 4Q: +6.7% YoY) was more than offset by the decline in imports (-2.0% YoY; 4Q: +7.3% YoY).

Sectoral wise, the moderation emanated from agriculture, manufacturing and construction sectors that offset the rise in services and mining sectors:

VI. Agriculture eased to +2.8% YoY (4Q: +10.7% YoY), dragged down by decline in rubber production (-29.1% YoY; 4Q: -2.0% YoY) due to intermittent rain and relatively low rubber prices. In addition, palm oil production growth also moderated (12.8% YoY; 4Q: +22.5% YoY) as the base effect from El Nino eased.

VII. The manufacturing sector slowed to +5.3% YoY (4Q: +5.4% YoY), reflecting broad-based moderation in domestic-oriented industries (food, beverages and Tobacco & Transport Equipment Sector) That Offset the Acceleration in Export Oriented Sectors (electrical & Electronics Sector as Well Petroleum, Chemical Sub-sectors);

VIII. Mining Sector Rebounded Slightly to +0.1% YoY (4Q: -0.3% YoY) Following Increase in Crude Oil Production;

IX. The Construction Sector Grew at a Slower Pace of +4.9% YoY (4Q: +5.9% YoY) Due to Slower Activity in the Residential and Non-residential Subsectors That Offset the Increase in Civil Engineering Activity.

X. Services Sector Grew at a Faster Pace of +6.5% YoY (4Q: +6.2% YoY) Due to Faster Increase in Finance (+6.7% YoY; 4Q: +5.0% YoY), Wholesale Trade (+7.9% YoY; 4Q: +7.4% YoY) and Government Services (+4.7% YoY; 4Q: +4.2% YoY).

The Ministry of Finance (MoF) Announced That Effective 1 June 2018, GST Will be Reduced From 6% to 0% for All Goods and Services That Are Currently Subjected to the GST Tax. The Zero GST Rate, Along With the Stabilisation of Petrol Prices Are Anticipated to Boost Consumption Activity. However, to Cover for the Revenue Gap, Tan Sri Dr Zeti Aziz (former BNM Governor and Now Member of the Council of Eminent Persons) Said That Government Will Review All Mega-infrastructure Projects and Undertake Rationalisation Initiatives of Government Spending to Reduce Inefficiencies, Plug Wastage and Leakages. As a Result, Government Consumption and Infrastructure Investment May Take a Back Seat in the Short-term Until There Is Further Clarity on Policy Decisions. Consequently, We Maintain Our GDP Forecast at 5.3% as the Increase in Consumption Could be Offset by Reduction in Government Spending and Possible Delay in Infrastructure Investment Due to a Prolonged Review Process. Nevertheless, Should Consumer Sentiment Increase Significantly, We Feel GDP Consumption Could Rise to as High as +8% YoY (current: +7.0% YoY; Pre-GST 2011-2014: +7.4% YoY) as Consumers Release Pent-up Demand, Lifting Overall GDP to as High as +5.8% YoY.

Following the Strong 1Q18 Current Account Figure of RM15bn, We Increase Our 2018 Current Account Projection to RM50bn (prior: RM40bn; 2017: RM40.3bn). The Increase in Current Account Is Also Anticipated to be Supported by Higher Commodity Prices and Moderate Global Demand for Manufactured Products. In Addition, Capital Imports Are Expected to be Slower-than-previously Anticipated Due to Policy Uncertainty.

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 Would Not Exceed BNM’s GDP Range of +5.5%-6.0% YoY and Inflation Will Become More Moderate This Year. In Addition, Real Interest Rates Have Returned to the Positive Territory, Mitigating the Risk of Financial Imbalance.

Source: Hong Leong Investment Bank Research - 18 May 2018