We expect 4Q 2019 GDP to decelerate sharply to +3.8% YoY (consensus forecast: 4.1% YoY; 3Q 2019: +4.4% YoY) following the release of latest indicators. Growth is anticipated to be slower due to weakness in commodity sectors and moderation in manufacturing sector. Should 4Q19 GDP release come in at the forecasted rate of 3.8% YoY, this would bring 2019 GDP to 4.4%, YoY slightly lower than our initial forecast of 4.5% YoY and government’s official forecast of 4.7% YoY.

We expect 4Q19 GDP to slow sharply +3.8% YoY (consensus forecast: 4.1% YoY; 3Q19: +4.4% YoY). 4Q19 GDP will be released on 12th February 2020. Should 4Q19 GDP release come in at the forecasted rate of 3.8% YoY, this would bring 2019 GDP to 4.4%, YoY slightly lower than our initial forecast of 4.5% YoY.

4Q19 GDP: Growth is anticipated to weaken due to decline in mining and agriculture sectors and moderation in manufacturing sector which offset the pickup in construction and services sectors.

The agriculture sector is expected to weaken in 4Q19 following decline in palm oil production (-17.2% YoY%; 3Q19: +9.2% YoY) following seasonally weak quarter and dry season. The mining sector is also anticipated to decline due to contraction in natural gas production (-2.1% YoY; 3Q19: +3.1% YoY) and crude oil production (- 5.0% YoY; 3Q19: -12.8% YoY), consistent with weak export demand. In the manufacturing sector, growth is expected to moderate as manufacturing IPI eased further (+2.8% YoY; 3Q19: +3.4% YoY) amid softer growth in both export-oriented (+2.6% YoY; 3Q19: +3.2% YoY) and domestic-oriented sectors (+2.9% YoY; 3Q19: +3.6% YoY). Meanwhile, construction sector growth is expected to strengthen, driven by rebound in construction of residential buildings (+2.7% YoY; 3Q19: -2.7% YoY) and higher growth in civil engineering activity (+7.9% YoY; 3Q19: +7.5% YoY) amid slower decline in construction of non-residential buildings (-10.3% YoY; 3Q19: -11.6% YoY). In the services sector, we also anticipate growth to pick up. While wholesale, retail trade, food and beverage sector moderated slightly to +6.9% YoY (3Q19: +7.8% YoY), motor vehicle sales strengthened (+3.6% YoY; 3Q19: +1.9% YoY) due to attractive year-end promotions and introduction of new models. Meanwhile, information & communication continued to increase (6.6% YoY; 3Q19: 6.0% YoY). On expenditure front, weakness in gross fixed capital formation is expected to continue in 4Q19, consistent with the deterioration in capital goods (-8.9% YoY; 3Q19: -12.5% YoY). Meanwhile, private consumption is expected to be steady, supported by better performance in consumption imports (+0.04% YoY; 3Q19: -0.9% YoY) and stable labour conditions. Number of employees engaged rose in the manufacturing (+1.4% YoY; 3Q19: +1.2% YoY) and services sector (+2.6% YoY; 3Q19: +2.5% YoY). Similarly, wages continued to grow in both sectors (manufacturing: +3.3% YoY; 3Q19: +3.2% YoY, services: +4.2% YoY; 3Q19: +4.1% YoY). Household loan also recorded modest increase of 4.7% in 4Q10 (3Q19: 4.6% YoY).

2020 GDP: In 1Q20, commodity sectors are expected to weigh on growth, as palm oil production weakens due to drought and cutback in fertiliser use, while weakness in mining sector may extend into the quarter following the recent rupture and fire at the Sabah-Sarawak Gas Pipeline. Meanwhile, manufacturing and services sectors are expected to record a slowdown in 1Q20 due to renewed concerns over the 2019-nCov outbreak and its impact on business and consumer spending. These downside risks facing the economy could reduce GDP growth by as much as 1.0ppt in 1Q20. Nevertheless, should the rate of infection be contained, the rebound in economic activity in the subsequent quarters could also be swift. Hence, we maintain our 2020 GDP forecast at 4.4% for now pending further clarity on the extent of the outbreak.

Source: Hong Leong Investment Bank Research - 11 Feb 2020