We lower our 2Q18 GDP growth estimate to +4.6% YoY from +5.1% YoY (1Q 2018: +5.4% YoY) following the release of various indicators. Moderation is expected to be driven by contraction in the commodity sectors and slower growth in the manufacturing and construction sectors. This is anticipated to offset the increase in retail and motor vehicle trade following the ‘zerorisation’ of GST that began in June 2018. Pending the release of final GDP print, we maintain our 2018 GDP at +5.2% YoY and retain our projection for BNM to maintain OPR at 3.25% for rest of 2018.

We lower our 2Q18 GDP growth estimate to +4.6% YoY from +5.1% YoY (1Q18: +5.4% YoY) following the release of various quarterly indicators. 2Q18 GDP will be released on 17th August 2018.

2Q18 GDP: Growth is expected to decelerate sharply, following contraction in the commodity sector, moderation in construction and manufacturing sector. In the commodity sector, agriculture sector is expected to register a contraction as palm oil production declined by -6.4% YoY (1Q18: +12.8% YoY) partly due to lagged effect of El-Nino in end-2015. Mining IPI also showed a decline (-3.5% YoY; 1Q18: 0% YoY). According to industry sources, the cut in natural gas supply from the Sabah Oil and Gas terminal to the Petronas LNG Complex in Bintulu had led to reduction in production. Meanwhile, value of construction work done showed a moderation in 2Q 2018 due to lower work done in the residential and non-residential segments. Manufacturing activity is expected to ease slightly, in line with deceleration in exports of E&E products (+10.2% YoY; 1Q18: +12.0% YoY). On the other hand, services sector is anticipated to remain steady in 2Q 2018 as the acceleration in consumption driven sectors such as wholesale and retail trade as well as motor vehicles offset the deceleration in finance and real estate services. Wholesale and retail trade grew by +7.0% YoY (1Q: +6.5% YoY) while motor vehicle trade turned around to register a growth of +3.5% YoY (1Q: -0.7% YoY) as consumers took advantage of the zero GST tax holiday that began in June 2018. The deceleration in finance, insurance activity (+3.7% YoY; 1Q: +7.4% YoY) and real estate activity (+5.3% YoY; 1Q: +5.6% YoY) could be attributed to government policy uncertainty amid the momentous change of guard following the 14th General Election on May 2018. On expenditure front, a net export is anticipated to contribute to overall GDP, but at a lower magnitude (RM27.2bn; 2Q17: RM24.1bn). Private consumption is forecasted to grow at a faster pace, supported by ‘zero-risation of GST’ and continued wage growth (manufacturing sector: +10.1% YoY; 1Q18: +14.0% YoY; services sector: 3.7% YoY; 1Q18: +3.5% YoY).

We retain our GDP forecast pending the final GDP print on 17th August 2018. Nevertheless, we anticipate GDP to pick up in 3Q 2018 as the full-effect of ‘zerorisation’ of GST is expected to drive consumption further. In addition, further government policy clarity is anticipated to enhance business confidence and activity. We reiterate our expectations for BNM to retain the OPR at 3.25% 2018:

- Growth: Expect GDP to be more moderate due to policy uncertainty but expected to recover as more clarity ensues. Downside risks remain high 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 has rebounded to the positive territory after being in the negative territory in 2017. Loan growth also continued to remain moderate at 5.0% (peak in May ‘11: +13.8% YoY).

Source: Hong Leong Investment Bank Research - 13 Aug 2018