Real GDP in 4Q18 rose +4.7% YoY (3Q18: +4.4% YoY), in line with our revised estimate and above the consensus estimate of +4.6% YoY. The expansion was driven by recovery in mining sector and slower decline in agriculture sector which offset the slight moderation in services and manufacturing sectors. On the expenditure front, expansion was driven by rebound in net exports. Full year 2018 GDP came in at +4.7% YoY (2017: +5.9% YoY), in line with our estimate.

DATA HIGHLIGHTS

Real GDP rose +4.7% YoY (3Q18: +4.4% YoY), in line with our revised estimate and above the consensus median estimate of +4.6% YoY.

On the expenditure front, expansion was driven by a rebound in net exports which contributed to an increase of +0.8 ppt (3Q18: -0.7 ppt), offsetting lower destocking activity during the quarter (-1.2 ppt; 3Q18: -1.4 ppt). Meanwhile, domestic demand moderated to +5.6% YoY (3Q18: +6.9% YoY).

I. Net exports rebounded during the quarter, pulling GDP up by +0.8 ppt (3Q18: -0.7 ppt). This was due to a rebound in exports (+1.3% YoY; 3Q18: -0.8% YoY) following strong E&E exports amid marginal rise in imports (+0.2% YoY; 3Q18: +0.1% YoY). The rise in exports could be partly attributed to front loading activity, which was in line with regional economies’ performance in the quarter. Meanwhile, destocking activity weighed on growth albeit at a slower rate (-1.2 ppt; 3Q18: -1.4 ppt), possibly due to depletion of stocks during the year-end holiday season;

II. Private investment slowed to +4.4% YoY (3Q18: +6.9% YoY) amid a decline in machinery and equipment investment (-1.5% YoY; 3Q18: +5.9% YoY) and slowdown in structure investment (+0.8% YoY; 3Q18: +1.8% YoY);

III. Public investment contracted at a slower pace (-4.9% YoY; 3Q18: -5.5% YoY) amid near completion of ongoing projects (e.g. RAPID), and cost rationalisation by the government;

IV. Public consumption moderated to +4.0% YoY (3Q18: +5.2% YoY) as the government undertook more prudent spending measures;

V. Private consumption moderated to +8.5% YoY (3Q18: +9.0% YoY) following the reintroduction of SST2.0. During the quarter, marginal propensity to consume eased but remained strong at 0.95 (3Q18: 1.14). Private consumption was supported by continued wage growth in manufacturing (+9.8% YoY; 3Q18: +9.6% YoY) and services sector (+4.1% YoY; 3Q18: +3.9% YoY). Government measures to alleviate cost of living, such as special payments to civil servants and pensioners also provided some buffer.

On the sectoral front, the expansion in GDP was supported by the commodity sector, namely agriculture and mining sectors which had dragged overall GDP in the previous quarter (+0.001 ppt; 3Q18: -0.5 ppt). Other sectors such as services, manufacturing and construction sectors grew at a slower pace.

VI. Agriculture sector declined at a slower pace of -0.4% YoY (3Q18: -1.4% YoY), as transitory production constraints ease;

VII. The mining sector registered a marginal recovery of +0.5% YoY (3Q18: -4.6% YoY) following improvement in natural gas production. Going forward, production at the Kebabangan gas field in Sabah is expected to return to full capacity in 2H 2019 pending the completion of pipeline repairs. Similarly, crude petroleum also improved; 

VIII. The manufacturing sector moderated to +4.7% YoY (3Q18: +5.0% YoY). The slower growth in food and beverages sub-sector (+1.8% YoY; 3Q18: +3.3% YoY) and moderation in wood products (+4.3% YoY; 3Q18: +6.1% YoY) and petrochemical products (+3.6% YoY; 3Q18: +3.9% YoY) offset the rise in electrical, electronic products (+6.9% YoY; 3Q18: +6.4% YoY); 

IX. The construction sector decelerated to +2.6% YoY (3Q18: +4.6% YoY) due to moderation in civil engineering projects, specialised construction activities and weakness in residential sub-sector; 

X. Services sector moderated to +6.9% YoY (3Q18: +7.2% YoY) on the back of deceleration in motor vehicles (+2.5% YoY; 3Q18: +8.3% YoY) finance (+3.2% YoY; 3Q18: +3.9% YoY) and information and communication services (+8.1% YoY; 3Q18: +8.4% YoY). Nevertheless, the moderation in retail trade post consumption tax holiday was modest as retail trade posted strong growth of +12.0% YoY (3Q18: +12.3% YoY). This was in line with the strong private consumption (+8.5% YoY; 3Q18: +9.0% YoY). 

Current account (CA) surplus widened to RM10.8bn; 3.0% of GNI (3Q18: RM3.8bn; 1.1% of GNI) due to higher goods account surplus (+RM33.0bn; 3Q18: +RM26.6bn). Meanwhile services income deficit increased (-RM4.3bn; 3Q18: -RM3.3bn) as well as secondary income deficit (-RM4.9bn; 3Q18: -RM4.5bn). Primary income recorded a smaller deficit of –RM12.9bn (3Q18: -RM15.0bn). In 2018, the current account stood at RM33.5bn (2017: RM40.3bn). This was above our CA forecast of RM26.0bn.

HLIB’S VIEW

In 4Q18, the uptick in growth was driven by rebound in net exports amid strong private consumption. BNM shared that despite the re-imposition of SST2.0, private consumption was surprisingly resilient. This was also reflected in the increase in discretionary spending such as accommodation and food & beverage spending that saw an uptick. Net exports also contributed to growth due to front-loading effect. 

In 2019, BNM opined that despite the dark clouds over the horizon, global growth is expected to grow at a respectable pace of +3.5% YoY, slightly below long-term average of +3.8% YoY (2000-2018). Based on this external outlook, Malaysia is anticipated to grow at a steady pace (BNM 2019 forecast will be updated on 27th March during Annual Report 2018). Private consumption is anticipated to remain supported by on-going wage growth, increase in employment and strong hiring intentions. On private investment, BNM shared that despite manufacturing firms seeing an increase in orders, firms remained cautious on capital outlay due to on going policy uncertainty. On this front, BNM is of the view there needs to be a review on the tax incentives to revive the vigour of investment within the country in the long run. On the external front, while Malaysia may benefit from the US-China trade war in the form of increased exports and investment, firms remained constrained by high capacity utilisation and continued policy uncertainty. Nevertheless, Malaysia is expected to benefit from the resumption of natural gas production in 2H2019 as temporary constraints ease further which will support trade activity. Overall, while BNM sounded a more cautious tone on the strength of the economy going forward, they maintain their expectation for Malaysian economy to grow on a steady path. 

We maintain our expectation for Malaysia to grow at a moderate pace of +4.6% YoY in 2019 (2018: +4.7% YoY). While we anticipate a rebound in commodity sectors (agriculture and mining) as transitory constraints fade, this is expected to be offset by slower growth in manufacturing, services and construction sectors as global trade moderates while consumers adjust to SST2.0 amid weaker sentiment. On OPR, we expect BNM to retain the policy rate at 3.25% till end-2019, premised on the assumption that underlying demand will remain steady.

Source: Hong Leong Investment Bank Research - 15 Feb 2019