We maintain our 3Q18 GDP growth estimate at +4.7% YoY (2Q 2018: +4.5% YoY; 1H 2018: +4.9% YoY) following the release of various indicators. The slight increase is expected to be driven largely by the services sector and marginal pick-up in the manufacturing sector that offset the contraction in the commodity sectors. Services sector is anticipated to be boosted by the temporary consumption tax holiday period. Pending the release of final GDP print, we maintain our 2018 GDP at +4.8% YoY and retain our projection for BNM to maintain OPR at 3.25%.

We maintain our 3Q18 GDP growth estimate at +4.7% YoY (2Q18: +4.5% YoY) following the release of various quarterly indicators. 3Q18 GDP will be released on 16th November 2018.

3Q18 GDP: Growth is expected to increase, supported by higher growth in services sector and slight increase in the manufacturing sector. This is anticipated to offset the larger contraction in the commodity sectors. Services sector is anticipated to accelerate, boosted by consumption related sectors such as wholesale & retail trade, food & beverage and motor vehicle sales. Wholesale & retail trade grew by +9.1% YoY (2Q18: +7.1% YoY), food and beverage increased by +9.7% YoY (2Q18: +9.3% YoY). Motor vehicles sales accelerated to +7.7% YoY (2Q18: +3.4% YoY). This is largely due to temporary consumption tax holiday in June – August 2018 period which brought forward consumption activity. Meanwhile, ‘finance and insurance’ sub-sector is also anticipated to normalise after the uncertainty during the GE14 period. In line with this, finance and insurance sub-sector rose by +5.6% YoY (2Q18: +4.3% YoY). Manufacturing sector is anticipated to increase marginally as manufacturing IPI showed a slight increase of +4.8% YoY (2Q18: +4.7% YoY), driven by the export oriented sector that offset the moderation in domestic sector. However, growth continues to be constrained by the commodity sector. Agriculture sector is expected to register a larger contraction as palm oil production declined by -8.0% YoY (2Q18: - 6.4% YoY) due to temporary factors. Mining IPI also showed a larger deterioration (- 5.6% YoY; 2Q18: -2.7% 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 continued to restrain overall production during the quarter. In addition, crude oil reversed to register a slight contraction of -0.8% YoY (2Q18: +2.3% YoY). Meanwhile, value of construction work done showed a moderation in 3Q18 (+5.2% YoY; 2Q18: +5.3% YoY) due to continued contraction in residential sub-sector and moderation in civil engineering works. On expenditure front, net export is anticipated to weigh on overall GDP due to lower trade surplus during 3Q18 period (RM25.2bn; 3Q17: RM26.3bn). Nevertheless, private consumption is forecasted to grow at a faster pace, supported by “zerorisation” of GST and continued wage growth (manufacturing sector: +9.6% YoY; 2Q18: +10.1% YoY; services sector: +3.9% YoY; 2Q18: 3.7% YoY).

We retain our GDP forecast pending the final GDP print on 16th November 2018. We anticipate GDP to moderate in 4Q18 as the expiration of “zerorisation” of GST is phased out with the introduction of SST in September 2018. Nevertheless, further clarity on government policy direction, moderate expansion in the global economy and the steady state of labour market is expected to remain supportive of overall growth.

We reiterate our expectations for BNM to retain the OPR at 3.25% as economic data remains in line with government’s forecast while CPI is projected to remain low before moving up in 2019 due to policy related decisions.

Source: Hong Leong Investment Bank Research - 13 Nov 2018