Real GDP moderated slightly to +4.4% YoY (2Q18: +4.5% YoY), lower than our estimate of +4.7% YoY and consensus estimate of +4.6% YoY. The decline was due to supply constraints in the commodity sectors and lower import duties due to GST tax holiday which offset the acceleration in services and manufacturing sectors. On the expenditure front, the moderation was driven by destocking activity and decline in net exports. Nevertheless, private sector activity continued to grow at a faster pace, indicating underlying private domestic demand remains well-anchored. While 4Q18 GDP is expected to improve as some of the temporary factors fade, slower-than-expected 3Q18 GDP growth and continued weakness in commodity sector in the immediate term continue to constrain growth. Hence, we lower our GDP estimate for 2018 to be more moderate at +4.7% YoY (previous: +4.8% YoY; 2017: +5.9% YoY).

DATA HIGHLIGHTS

Real GDP moderated slightly in 3Q18 to +4.4% YoY (2Q18: +4.5% YoY). This was lower than our estimate of +4.7% YoY and consensus estimate of +4.6% YoY.

On the expenditure front, destocking activity and net exports contributed to a decline of -1.4 ppt (2Q18: -0.9 ppt) and -0.7 ppt (2Q18: +0.1 ppt) respectively, resulting in slower growth during the quarter. Importantly, domestic demand registered a stronger growth (+6.9% YoY; 2Q18: +5.6% YoY).

I. Net export growth declined during the quarter, weighing on GDP by -0.7 ppt (2Q18: +0.1 ppt). This was due to a decline in exports (-0.8% YoY; 2Q18: +2.0% YoY) amid lower production in the commodity sector and moderation in imports (+0.1% YoY; 2Q18: +2.1% YoY). Meanwhile, destocking activity also constrained growth by -1.4 ppt (2Q18: -0.9 ppt) as retailers utilized their stocks to cater to the sudden surge in demand following the temporary tax holiday period;

II. Public investment registered a smaller contraction of -5.5% YoY (2Q18: -9.8% YoY) as work resumed following the uncertainty surrounding the 14th General Election period. Nevertheless, the continued decline in public investment was due to the near completion of ongoing projects (e.g. RAPID), reprioritisation and cost rationalisation of major infrastructure projects;

III. Private investment rose +6.9% YoY (2Q18: +6.1% YoY), supported by acceleration in machinery and equipment investment (+5.9% YoY; 2Q18: +3.6% YoY) that offset the slowdown in structure investment (+1.8% YoY; 2Q18: +2.1% YoY);

IV. Public consumption grew by +5.2% YoY (2Q18: +3.1% YoY) on the back of higher spending in supplies and services which offset the moderation in emoluments;

V. Private consumption accelerated to +9.0% YoY (2Q18: +8.0% YoY) following a boost in household spending during the tax holiday period. During the quarter, marginal propensity to consume surged to 1.14 (2Q18: 0.95). Furthermore, continued wage growth in manufacturing (+9.6% YoY; 2Q18: +10.1% YoY) and services sector (+3.9% YoY; 2Q18: +3.7% YoY) supported the strong consumption activity recorded during the quarter.

Sectoral wise, the moderation stemmed from decline in commodity sectors (-0.5 ppt; 2Q18: -0.4 ppt), namely agriculture and mining sectors, and large decline in import 

duties (-0.5 ppt; 2Q18: 0.0 ppt). Other sectors such as services and manufacturing grew at a stronger pace while construction sector grew at a slower pace: 

VI. Agriculture sector declined at a slower pace of -1.4% YoY (2Q18: -2.5% YoY), weighed down by protracted recovery in palm oil production (-8.0% YoY; 2Q18: -6.4% YoY) due to weak demand and excess supply from Indonesia as well as production constraints; 

VII. The mining sector contracted at a faster pace of -4.6% YoY (2Q18: -2.2% YoY) due largely to supply disruptions and gradual pipeline repairs in East Malaysia affecting liquid natural gas production (-9.8% YoY; 2Q18: -7.2% YoY). Meanwhile, crude oil petroleum contracted by -0.7% YoY (2Q18: +2.2% YoY); 

VIII. Manufacturing sector rose slightly by +5.0% YoY (2Q18: +4.9% YoY). Stronger growth in electrical, electronics, wood and transport equipment sub sectors offset the moderation in other sub-sectors such as food and beverages, textiles and metal products; 

IX. The construction sector moderated slightly to +4.6% YoY (2Q18: +4.7% YoY). Growth was sustained by civil works in existing projects despite weak growth in residential sub-sector and on-going review of several infrastructure projects; 

X. Services sector accelerated to +7.2% YoY (2Q18: +6.5% YoY) driven by a surge in retail trade (+12.3% YoY; 2Q18: +8.1% YoY), motor vehicles (+8.3% YoY; 2Q18: +3.8% YoY) and finance services (+3.9% YoY; 2Q18: +2.2% YoY) which offset the moderation in information and communication (+8.4% YoY; 2Q18: +8.6% YoY) and deceleration in government services (+3.8% YoY; 2Q18: +4.5% YoY). 

Current account (CA) surplus narrowed slightly to RM3.8bn (2Q18: RM3.9bn). The goods account surplus remained steady (+RM26.6bn; 2Q18: +RM26.1bn) while services income recorded lower deficit (-RM3.3bn; 2Q18: -RM6.2bn). Primary income registered steady larger deficit (-RM15.0bn; 2Q18: -RM11.2bn) while secondary income deficit remained steady (-RM4.5bn; 2Q18: -RM4.7bn). 1Q-3Q current account stood at RM22.7bn (2017: RM40.3bn). We downgrade our CA forecast to RM26bn (previous: RM40bn).

HLIB’S VIEW

GDP: BNM shared their expectations for GDP to improve in 4Q 2018 after recording the trough in 3Q 2018. Growth in the 3Q 2018 was negatively affected by temporary factors such as supply-side disruptions, large destocking activity and significant decline in import duties. On the supply side, commodity sectors weighed on GDP by - 0.5ppt (2Q18: -0.4ppt) while lower import duties weighed on growth by -0.5ppt (2Q18: 0ppt). According to DOSM, the large contraction in import duties was due to zerorisation of GST in July and August that led to lower tax collection on import duties. On the demand side, underlying demand was stronger as it contributed +6.4ppt to overall GDP in 3Q18 (2Q18: +5.2ppt). However, this was offset by destocking activity (-1.4ppt; 2Q18: -0.9ppt) as retailers destocked to cater to the surge in demand during tax holiday period. In 4Q 2018, we expect a slight uptick in GDP as some of these temporary factors fade. Nevertheless, following the weaker-than-expected 3Q18 GDP report and continued constraints faced in the commodity sector, we lower our 2018 GDP slightly to +4.7% YoY (previous: +4.8% YoY). Downside risks remain high. Any escalation in trade tensions may negatively affect consumer and investor sentiment, which may have severe implications to slower global demand and hence to growth.

CPI: We maintain our 2018 CPI forecast at 1.3% YoY. Importantly, demand-pull inflation is not expected to crystallise due to high household debt and moderate demand.

OPR: On OPR, despite the slower GDP growth, our base case is for BNM to retain the policy rate at 3.25% till end-2019, premised on the assumption that underlying demand (external sector and private spending) will grow at a more moderate pace, but remain sustainable.

Source: Hong Leong Investment Bank Research - 19 Nov 2018