We increase our 4Q18 GDP growth estimate to +4.7% YoY (prior: +4.5% YoY; 3Q 2018: +4.4% YoY; 1H 2018: +4.9% YoY) following the release of various indicators. The slight increase is expected to be driven largely by rebound in mining sector and slower decline in agriculture sector that offset the marginal deceleration in manufacturing and services sectors. Pending the release of the final GDP print, we maintain our full year 2018 GDP at +4.7% YoY and 2019 at +4.6% YoY and retain our projection for BNM to maintain OPR at 3.25%.

We increase our 4Q18 GDP growth estimate to +4.7% YoY (prior: +4.5% YoY; 3Q18: +4.4% YoY) following the recent release of various quarterly indicators. 4Q18 GDP will be released later today (14th February 2019).

4Q18 GDP: Growth is expected to increase, supported by slower decline in agriculture sector and rebound in mining production as previous transitory constrains ease (e.g. El Nino and gas pipeline leak). This is anticipated to offset the slight moderation in manufacturing, services sectors amid continued decline in import duties.

The agriculture sector is anticipated to record slower contraction following lower pace of decline in palm oil production (-2.9% YoY; 3Q18: -8.0% YoY). In the mining sector, growth is anticipated to be supported by rebound in crude oil (+1.2% YoY; 3Q18: - 0.8% YoY) and natural gas production (+0.1% YoY; 3Q18: -9.8% YoY). LNG production is expected to pick up further in 2019 as the disruption caused by the associated pipeline gas leak is anticipated to recover. According to Petronas, production at the Kebabangan gas field in Sabah was expected to return to full capacity by August 2019. Manufacturing sector is anticipated to decelerate marginally as manufacturing IPI showed a slight moderation of +4.5% YoY (3Q18: +4.8% YoY), driven by slower growth in the domestic-oriented sector (+3.5% YoY; 3Q18: +4.4% YoY) amid sustained export-oriented sector (+5.0% YoY; 3Q18: +5.0% YoY). In the services sector, retail trade activity moderated, but remained strong at +11.8% YoY (3Q18: +12.1% YoY) despite the re-imposition of SST2.0 in September 2018. The pullback in consumption was more apparent in durable goods items such as motor vehicles sales which registered a sharp deceleration of +1.9% YoY (3Q18: +7.5% YoY) as consumers took advantage of the tax holiday period during Jun-Aug 2018 period. In the construction sector, growth was driven by positive growth in civil engineering, special trade activities and non-residential building that offset the contraction in residential construction. Import duty is forecasted to record negative growth following lower tax collection (Sep-Dec 18: RM5.4bn; 4Q17: RM14.5bn).

On expenditure front, net export is anticipated to contribute to overall GDP due to higher trade surplus during 4Q18 period (RM34.6bn; 4Q17: RM27.3bn). Private consumption is forecasted to grow at a more moderate pace as zero tax holiday period fades. Nevertheless, consumption remains supported by strong labour market and positive wage growth (manufacturing sector: +9.8% YoY; 3Q18: +9.6% YoY; services sector: +4.1% YoY; 3Q18: +3.9% YoY).

2019 GDP: We retain our 2018 GDP forecast at +4.7% YoY pending the final print later today. In 2019, we anticipate GDP to record moderate growth of +4.6% YoY (2018e: +4.7% YoY). While we anticipate commodity sectors (agriculture and mining) to rebound as temporary factors continue to ease, this is anticipated to be offset by slower growth in manufacturing, services and construction activity as global trade moderates and consumers adjust to SST2.0 amid lower consumer sentiment. We maintain our expectations for BNM to retain the OPR at 3.25% in 2019 unless global growth condition deteriorates significantly.

Source: Hong Leong Investment Bank Research - 13 Feb 2019