We increase our 2Q19 GDP growth estimate to +4.8% YoY (previous: 4.4% YoY; 1Q19: +4.5% YoY) following the release of various better-than-expected indicators. The increase is expected to be driven by strong rebound in mining sector and slight pickup in manufacturing and construction sectors that offset moderation across other sectors. Nevertheless, downside risks persist as a potential worsening of US-China trade relations would lead to further pullback in investment and trade activities. We maintain our 2019 GDP at +4.5% YoY (2018: +4.7% YoY).

We increase our 2Q19 growth estimate to +4.8% YoY (1Q19: +4.5% YoY). 2Q19 GDP will be released on 16th August 2019.

2Q19 GDP: Growth is expected to accelerate following a strong rebound in mining sector due to supply normalisation as well as increase in manufacturing and construction sectors that offset moderate growth in agriculture and services sectors.

The agriculture sector is anticipated to record a deceleration following moderation in palm oil production (+9.8% YoY% YoY; 1Q19: +10.3% YoY) and rubber production (+2.9% YoY; 1Q19: +13.2% YoY). In the mining sector, growth is anticipated to rebound, driven by strong recovery in natural gas production (+8.9% YoY; 1Q19: -1.3% YoY) due to supply normalisation in East Malaysia gas fields. This is expected to offset the further decline in crude oil production (-2.6% YoY; 1Q19: -2.8% YoY) following the maturity of some oil fields and extension of OPEC and non-OPEC agreement to limit production. Manufacturing sector growth is expected to pick up slightly as manufacturing IPI was marginally higher in 2Q19 (+4.1% YoY; 1Q19: +4.0% YoY), driven by export-oriented sector (+3.8% YoY; 1Q19: +3.4% YoY) that offset softer growth in domestic-oriented sector (+4.8% YoY; 1Q19: +5.1% YoY). In the services sector, we anticipate a slight moderation in growth. Meanwhile, construction sector growth was led by continued growth in civil engineering activity (+8.2% YoY; 1Q19: +9.5% YoY), that offset slower decline in residential buildings (- 1.1% YoY; 1Q19: -7.4% YoY) and steeper decline in non-residential buildings (-9.3% YoY; 1Q19: -4.4% YoY). Retail trade activity eased to +8.9% YoY (1Q19: +9.3% YoY) as consumer sentiment remained below the optimism threshold of 100.0 (93.0; 1Q19: 85.6) following reintroduction of SST 2.0. Motor vehicle sales also moderated to +4.2% YoY (1Q19: +4.4% YoY) as consumer spending normalised after the tax holiday period.

On expenditure front, net export is anticipated to contribute to overall GDP due to higher trade surplus during 2Q19 period (RM30.1bn; 2Q18: RM27.1bn). Exports rebounded by +0.2% YoY (1Q19: -0.7% YoY) while imports fell at a slower pace of - 1.2% YoY (1Q19: -2.5% YoY). The fall in imports was largely due to a sharp decline in capital goods, which point to continued weakness in private investment in 2Q19. Meanwhile, private consumption is expected to grow at a moderate pace. Nevertheless, consumption is anticipated to remain supported by continued wage growth. In the manufacturing sector, wages moderated (+3.9% YoY; 1Q19: +7.0% YoY), while in the services sector, wages recorded a stronger growth (+4.4% YoY; 1Q19: +3.8% YoY).

2019 GDP: The acceleration in 2Q19 is anticipated to be driven significantly by rebound in mining sector. While manufacturing sector continued to grow at a respectable pace, the slower momentum towards the end of 2Q19 and the persistent threat of worsening trade relations is anticipated to lead to moderation in 2H19. For now, we maintain our forecast for GDP to grow at a moderate pace of +4.5% YoY (2018: +4.7% YoY), as global economy continues to exhibit signs of weakness while volatility in financial market may affect sentiment and investment prospects.

Source: Hong Leong Investment Bank Research - 14 Aug 2019