Real GDP accelerated to +8.9% YoY in 2Q22 (1Q22: +5.0% YoY), broadly within our forecast of +9.0% YoY but above consensus estimate of +7.0% YoY. Growth was driven by the services, manufacturing, and construction sectors, offsetting contractions in the mining and agriculture sectors. On the demand front, growth was underpinned by stronger private consumption and gross fixed capital formation. We upgrade our GDP forecast to +6.5% YoY (previous: +5.9% YoY), slightly higher than BNM’s forecast range of 5.3-6.3% YoY.

DATA HIGHLIGHTS

In 2Q22, real GDP accelerated by +8.9% YoY (1Q22: +5.0% YoY), broadly within our forecast of +9.0% YoY but above consensus estimate of +7.0% YoY. Business activities picked up amid the reopening of the economy, resulting in another three consecutive months of positive GDP growth (Apr: +5.6% YoY; May: +5.0% YoY; Jun: +16.5% YoY), though partly lifted by the low base effect from the Jun 2021 lockdown. Meanwhile, GDP eased on a quarterly sa basis (+3.5%; 1Q22: +3.8%).

On the demand front, growth was driven by stronger private consumption (+18.3% YoY; 1Q22: +5.5% YoY) and gross fixed capital formation (+5.8% YoY; 1Q22: +0.2% YoY). Public consumption moderated (+2.6% YoY; 1Q22: +6.7% YoY), while restocking activity (-1.0ppt; 1Q22: +2.2ppt) and net exports (-1.7ppt; 1Q22: -1.5ppt) contributed negatively to overall GDP:

I. Private consumption (+18.3% YoY; 1Q21: +5.5% YoY) picked up on the back of higher spending on recreation services & culture (+75.1% YoY; 1Q22: +5.9% YoY) as well as restaurants & hotels (+36.7% YoY; 1Q22: +10.9% YoY). There was also an increase in spending for transport (+91.1% YoY; 1Q22: +8.9% YoY) and food & non-alcoholic beverages (+11.0% YoY; 1Q22: +4.6% YoY). The increase in spending activity reflects the release of pent-up demand amid full reopening of the economy;

II. Gross fixed capital formation accelerated (+5.8% YoY; 1Q22: +0.2% YoY). By asset type, structure recorded an upturn (+3.8% YoY; 1Q22: -7.9% YoY), while machinery and equipment moderated (+9.6% YoY; 1Q 22: +12.0% YoY). Sectorial wise, private investment increased (+6.3% YoY; 1Q22: +0.4% YoY) following higher capital spending in services and manufacturing sectors. Public sector investment rebounded as well (+3.2% YoY; 1Q22: -0.9% YoY);

III. The moderation in public consumption to +2.6% YoY (1Q22: +6.7% YoY) was attributed to slower spending on supplies & services;

IV. Net exports continued to contribute negatively to overall GDP (-1.7ppt; 1Q22: -1.5ppt) as imports growth (+14.0% YoY; 1Q22: +11.1% YoY) outpaced exports growth (+10.4% YoY; 1Q22: +8.0% YoY), following stronger domestic demand and companies’ mitigation measures to build up inventories.

On the supply side, expansion was mainly driven by stronger performance in the services, manufacturing and construction sectors. Agriculture posted a downturn while the mining sector continued to contract for another quarter:

I. The agriculture sector contracted -2.4% YoY (1Q22: +0.1% YoY) amid declines across most subsectors, notably palm oil (-3.9% YoY; 1Q22: +3.9% YoY) due to the acute labour shortage issue. Forestry & logging (-8.1% YoY; 1Q22: -5.2% YoY) and rubber production (-16.9% YoY; 1Q22: -22.9% YoY) also dipped;

II. The mining sector remained weak (-0.5% YoY; 1Q22: -1.1% YoY) due to the closures of several oil and gas facilities for maintenance. Crude petroleum declined at a softer pace (-2.8% YoY; 1Q22: -7.4% YoY) while natural gas production slowed (+0.4% YoY; 1Q22: +3.3% YoY);

III. The manufacturing sector advanced +9.2% YoY (1Q22: +6.6% YoY), supported by continued demand for semiconductors and other consumer-related products. This is reflected by the higher growth in motor vehicles and transport equipment (+21.0% YoY; 1Q22: +2.1% YoY) and electronic components, communication equipment & consumer electronics (+19.3% YoY; 1Q22: +18.0% YoY). Chemicals & chemical products and pharmaceutical products (+4.7% YoY; 1Q22: +2.0% YoY) and refined petroleum products (+2.8% YoY; 1Q22: +2.4% YoY) also picked up;

IV. The construction sector rebounded (+2.4% YoY; 1Q22: -6.2% YoY) following an upturn in residential buildings (+2.7% YoY; 1Q22: -15.3% YoY) and pickup in non-residential buildings (+10.1% YoY; 1Q22: +0.9% YoY), offsetting the continued decline in civil engineering works (-8.2% YoY; 1Q22: -16.1% YoY) and slower specialized construction activities (+7.0% YoY; 1Q22: +10.4% YoY);

V. The services sector expanded strongly (+12.0% YoY; 1Q22: +6.5% YoY), underpinned by higher consumer spending following the reopening of international borders, transition to endemicity and support from policy measures. Growth was mostly broad-based; particularly in accommodation (+139.2% YoY; 1Q22: 86.0% YoY), motor vehicles (+66.3% YoY; 1Q22: +8.9% YoY), transport & storage (+35.8% YoY; 1Q22: +25.8% YoY) and real estate (+34.7% YoY; 1Q22: +13.3% YoY). Food & beverages (+24.5% YoY; 1Q22: +16.8% YoY) and retail trade (+21.6% YoY; 1Q22: +5.4%) also saw higher growth.

Current account (CA) surplus widened to RM4.4bn or 1.0% of GNI (1Q22: RM3.0bn or 0.7% of GNI) owing to a smaller deficit in the primary income account (-RM14.7bn; 1Q22: -RM20.1bn) supported by higher income generated by Malaysian firms investing abroad. The services account also recorded a smaller deficit of -RM12.3bn (1Q22: -RM15.0bn), buoyed by an increase in travel receipts following the reopening of international borders. Meanwhile, the goods account recorded a smaller surplus (RM34.0bn; 1Q22: RM40.5bn).

HLIB’S VIEW

While we still expect a slowdown in 4Q22, we do not think it will be as sharp given the underlying strength in the economy thus far. Unemployment rate has continued to trend downwards (3.8%; peak: 5.3%), private sector wage growth has improved (2Q22: 7.8% YoY; 1Q22: 4.7% YoY) and manufacturing sales is expected to remain strong, albeit at a more moderate trend (2023f: 5.1% 2022: 16.3%). Consequently, we upgrade our GDP forecast to 6.5% YoY, slightly higher than BNM’s forecast range of 5.3-6.3% YoY.

While there continues to be headwinds on external demand from slower global growth, BNM expects the Malaysian economy to continue to be supported by strong domestic demand. Growth would also benefit from the improving labour market conditions and higher tourist arrivals. Meanwhile, headline inflation is expected to trend higher in some months for the remainder of the year, due partly to the base effect from the discount on electricity prices in 3Q21. Core inflation is also projected to average higher, as demand continues to improve amid the high-cost environment. However, the extent of upside pressures to inflation is expected to remain partially contained, due to the existing price control measures and subsidies. Taking these developments into account, we maintain our expectation for BNM to raise OPR by another 25bps in Sep, bringing OPR to 2.5% by end-2022.

Source: Hong Leong Investment Bank Research - 15 Aug 2022