Real GDP increased by +4.9% YoY (1Q19: +4.5% YoY), slightly above our estimate of +4.8% YoY and consensus estimate of +4.7% YoY. The pickup in growth was driven largely by the rebound in mining sector amid a rise in manufacturing as well as construction sector. On the demand front, growth was supported by higher private consumption and positive net exports due to import compression.

DATA HIGHLIGHTS

Real GDP rose +4.9% YoY (1Q19: +4.5% YoY), slightly above our estimate of +4.8% YoY and the consensus estimate of +4.7% YoY.

On the expenditure front, growth was driven by stronger domestic demand (+4.6% YoY; 1Q19: +4.4% YoY) amid higher contribution from net exports (+1.4 ppt; 1Q19: +0.9 ppt) and continued destocking activity (-0.7 ppt; 1Q19: -0.5 ppt).

I. Net exports increased in 2Q19, contributing +1.4 ppt to GDP (1Q19: +0.9 ppt). This was due to decline in imports -2.1% YoY (1Q19: -1.4% YoY), mainly on the back of lower capital imports. Export growth remained marginal (+0.1% YoY; 1Q19: +0.1% YoY);

II. Private consumption picked up to +7.8% YoY (1Q19: +7.6% YoY), supported by wage growth especially in the services sector (+6.2% YoY; 1Q19: +6.0% YoY) while manufacturing wage growth grew at a slower pace (+3.9% YoY; 1Q19: +7.0% YoY). Nevertheless, marginal propensity to consume fell to 0.90 (1Q19: 0.96).

III. Private investment rose +1.8% YoY (1Q19: +0.4% YoY) contributed by the rebound in structure investment (+1.2% YoY; 1Q19: -1.3% YoY). Nevertheless, machinery and equipment investment continued to record a decline (-4.2% YoY; 1Q19: -7.4% YoY) due to weak global economic sentiment;

IV. Public investment posted a decline of -9.0% YoY (1Q19: -13.2% YoY) due to completion of mega projects and on-going review of other projects that are yet to be implemented;

V. Public consumption decelerated to +0.3% YoY (1Q19: +6.3% YoY) following lower spending in emoluments and subsidies;

On the sectoral front, the expansion in GDP was driven by rebound in mining sector and higher growth in manufacturing and construction sectors which offset moderation across agriculture and services sectors.

VI. Agriculture sector growth softened to +4.2% YoY (1Q19: +5.6% YoY), due to moderation in oil palm (+9.5% YoY; 1Q19: +9.8% YoY) and deceleration in rubber sub-sector (+2.1% YoY; 1Q19: +12.0% YoY);

VII. The mining sector posted a rebound of +2.9% YoY (1Q19: -2.1% YoY), driven by strong recovery in natural gas production (+9.4% YoY; 1Q19: -0.5% YoY) which offset the slower decline in crude oil production (-4.2% YoY; 1Q19: - 4.4% YoY). The recovery in natural gas production was attributed to supply normalisation following disruption in the East Malaysia gas fields in 2018. Meanwhile, crude oil production may have been weak following maintenance, extension of OPEC and non-OPEC agreement and maturity of some oil fields;

VIII. Growth in the manufacturing sector was marginally higher at +4.3% YoY (1Q19: +4.2% YoY). Higher growth in computers & peripheral equipment (+11.9% YoY; 1Q19: +3.7% YoY), motor vehicles (+7.3% YoY; 1Q19: +6.5% YoY) and furniture (+8.3% YoY; 1Q19: +8.1% YoY) offset the moderation in electrical equipment (+2.5% YoY; 1Q19: +4.9% YoY) and electronic components & boards, communication equipment and consumer electronics (+4.1% YoY; 1Q19: +4.5% YoY);

IX. The construction sector expanded by +0.5% YoY (1Q19: +0.3% YoY) amid stronger growth in specialised construction activities (+4.7% YoY; 1Q19: +2.9% YoY) which offset the moderation in civil engineering (+5.4% YoY; 1Q19: +7.1% YoY) and decline in residential (-1.1% YoY; 1Q19: -7.2% YoY) and non-residential sub-sectors (-9.1% YoY; 1Q19: -4.0% YoY);

X. The softer growth in services sector (+6.1% YoY; 1Q19: +6.4% YoY) stemmed from moderation across wholesale trade (+4.8% YoY; 1Q19: +5.1% YoY), information and communication services (+6.3% YoY; 1Q19: +7.2% YoY), insurance (+2.2% YoY; 1Q19: +10.9% YoY) and government services (+3.7% YoY; 1Q19: +4.3% YoY).

Current account (CA) surplus narrowed to RM14.3bn; 3.9% of GNI (1Q19: RM16.4bn; 4.7% of GNI) due to smaller goods account surplus (+RM28.1bn; 1Q19: +RM33.8bn). Meanwhile, services income deficit widened to -RM3.4bn (1Q19: -RM1.8bn). Primary and secondary income deficit was also smaller at -RM5.5bn (1Q19: -RM10.1bn) and - RM4.9bn (1Q19: -RM5.5bn) respectively.

HLIB’S VIEW

The better-than-expected 2Q19 GDP was driven by strong private consumption which was sustained by continued employment, cash handouts and festive season. Nevertheless, the weaker wage growth in the manufacturing sector, cautious consumer sentiment and high base effect is anticipated to lead to normalisation of private consumption in 2H2019. In line with weaker global sentiment and heightened economic uncertainty, Malaysia’s gross fixed investment continued to decline. While BNM is working closely with different government agencies (MIDA and MITI) to attract investment, we opine that conditions are anticipated to remain challenging. Exports are also anticipated to remain subdued, consistent with weaker global growth and decline in the global manufacturing PMI (Jul: 49.3; Jun: 49.4). On the supply side, the normalisation of supply conditions in the commodity sector led to 0.5ppt uptick to overall GDP. While we anticipate these sectors to normalise further, weaker underlying demand is anticipated to have a knock-on effect in manufacturing and services sector in 2H19.

BNM shared that they are maintaining their GDP projection of 4.3-4.8% YoY in 2019 (1H19: +4.7% YoY), supported by normalisation in commodity sectors. BNM reinforced the view that monetary policy remains dependent on growth outlook and inflation projections. Despite strong domestic demand underpinning the resilient growth in 2Q19, they expect private consumption to normalise in 2H19. On the global front, BNM acknowledged that global outlook remains confronted with considerable downside risks. In BNM’s box article, they opined that developments in the past year have shown the temporary retreat from free trade has evolved to a potentially longer term threat. In the worst case of trade dispute which also includes blanket tariffs on automobiles and electronics, global growth could potentially fall to 2.3% in 2020, the weakest since Global Financial Crisis with negative ramifications on Malaysia. BNM also shared that inflation is projected to remain benign with minimal risk of substantial increase. Against this environment, we maintain our expectation for BNM to have an easing bias in subsequent MPC meetings and reduce OPR by 25bps as early as November 2019 MPC meeting.

Ahead of FTSE Russell’s decision on Malaysia’s bond position in September 19, BNM has announced additional measures (please click here) aimed at improving hedging flexibility and efficiency for businesses. While these measures may be gradual in nature, it signals BNM’s commitment to improve on-shore liquidity in a progressive manner. Hence, the latest measures together with earlier announcement in May 2019, may lead to Malaysia remaining on a negative watch list for now.

Source: Hong Leong Investment Bank Research - 19 Aug 2019