We expect 2Q22 GDP to expand by +9.0% YoY (consensus forecast: +7.0% YoY; 1Q22: +5.0% YoY), underpinned by stronger performance in the services, manufacturing and construction sectors. On the demand front, private consumption will drive overall growth following the reopening of international borders and release of pent-up demand. Pending the release of actual 2Q22 GDP print, we keep our 2022 forecast unchanged at +5.9% and expect BNM to raise OPR by another 25bps in Sep.

2Q22 GDP: Stronger growth is expected to be underpinned by services, manufacturing and construction sectors. On the demand side, private consumption is projected to be the largest driver of growth.

The services sector is expected to lift 2Q22 GDP growth, as reflected by the strong volume index of services showing (+16.7% YoY; 1Q22: +7.0% YoY). Mobility has recovered to pre-pandemic levels alongside the revival of tourism activities, which led to improvements in wholesale & retail trade (+19.3% YoY; 1Q22: +3.9% YoY), food & beverages (+29.4% YoY; 1Q22: +16.3% YoY) and accommodation (+179.0% YoY; 1Q22: +85.9% YoY). The manufacturing sector is also projected to strengthen following higher production in 2Q22 (+9.2% YoY; 1Q22: +6.3% YoY), supported by both domestic (+13.9% YoY; 1Q22: +5.4% YoY) and export-oriented manufacturing sectors (+7.7% YoY; 1Q22: +6.7% YoY), also aided by low base effect. The construction sector is expected to post a rebound, reflected by the upturn in value of construction work done (+6.1% YoY; 1Q22: -6.1% YoY) attributed to the increase in residential and non-residential buildings. Meanwhile, we expect growth to shrink for the agriculture sector as palm oil production contracted (-5.1% YoY; 1Q22: +4.4% YoY), likely due to low fertiliser applications and acute labour shortage. Another quarter of contraction is also expected for the mining sector, following the continued downtrend in mining IPI (-1.0% YoY; 1Q22: -1.7% YoY) as crude petroleum production declined further (-3.3% YoY; 1Q22: -8.3% YoY) while natural gas production slowed (+0.7% YoY; 1Q22: +3.3% YoY).

On the expenditure front, Malaysia’s private consumption is expected to accelerate following the reopening of the economy, EPF withdrawal schemes and improved labour market conditions. This is seen through the jump in retail sales (+23.9% YoY; 1Q22: +5.1% YoY), supported by positive wage growth in both the manufacturing (+5.2% YoY; 1Q22: +4.1% YoY) and services sectors (+9.3% YoY; 1Q22: +5.0% YoY). At the same time, the unemployment rate trended lower during the quarter (3.9%; 1Q22: 4.1%). Malaysia’s net export performance is expected to detract from overall 2Q22 GDP, following higher imports, especially on the intermediate imports front.

2022 GDP: Positive growth momentum is expected to continue in 3Q 2022 supported by low base effect, the reopening of international borders, transition to endemicity as well as the EPF special withdrawal scheme. We expect 4Q 2022 growth to slowdown on account of lower global demand. Downside risks to growth remain prominent, stemming from further escalation of geopolitical conflicts and a high inflationary environment. Concerted efforts by central banks to keep a lid on inflation also risks a sharper slowdown in global growth. Nevertheless, we maintain our 2022 GDP forecast at +5.9% YoY and maintain expectations for BNM to raise OPR by another 25bps in Sep, bringing OPR to 2.5% by end-2022.

Source: Hong Leong Investment Bank Research - 12 Aug 2022