We revise upwards our 3Q22 GDP growth estimate to +14.0% YoY (previously: +10.8% YoY; consensus: +12.5% YoY; 2Q22: +8.9% YoY). Stronger growth is expected across the board, particularly in the services, manufacturing, and construction sectors. On the demand front, growth is anticipated to be primarily driven by robust private consumption. Pending the release of actual 3Q22 print, we see upside bias to our 2022 forecast of +6.5% YoY, while maintaining expectation for BNM to raise OPR by another 50bps by 1H23.

3Q22 GDP preview: We revise upwards our 3Q22 GDP growth estimate to +14.0% YoY (previously: +10.8% YoY; consensus: +12.5% YoY; 2Q22: +8.9% YoY) following better-than-expected economic releases thus far, aided by low base effect. Growth is expected to be driven by stronger performances across the board, particularly in the services, manufacturing and construction sectors. On the demand side, growth is anticipated to be primarily led by private consumption.

We expect a pickup in the services sector, reflected by the strong volume index of services showing in 3Q22 (+23.1% YoY; 2Q22: +16.7% YoY) amid the vibrant domestic landscape and uptick in tourism-related activities following the international borders reopening. In line with this, growth was recorded largely in wholesale & retail trade (+25.9% YoY; 2Q22: +19.3% YoY), food & beverages (+36.4% YoY; 2Q22: +29.4% YoY), and accommodation (+344.4% YoY; 2Q22: +179.0% YoY). The manufacturing sector is also anticipated to strengthen further, as production gathered pace in 3Q22 (+13.4% YoY; 2Q22: +9.3% YoY) on the back of higher growth in both the export-oriented (+11.4% YoY; 2Q22: +7.7% YoY) and domestic-oriented manufacturing sectors (+19.2% YoY; 2Q22: +13.8% YoY), partly aided by low base effect. Similarly, the construction sector is expected to record higher growth, reflected by the jump in value of construction work done (+23.2% YoY; 2Q22: +6.1% YoY) mainly concentrated in the civil engineering sector and non-residential buildings. Meanwhile, the mining sector is expected to gain momentum following a rebound in mining IPI (+8.6% YoY; 2Q22: -1.1% YoY) due to stronger production in crude petroleum (+1.8% YoY; 2Q22: -3.3% YoY) and natural gas (+13.8% YoY; 2Q22: +0.6% YoY). We also expect the agriculture sector to post a small rebound, following an upturn in palm oil production (+2.6% YoY; 2Q22: -5.1% YoY) on the back of the improving labour situation and competitive price over other oils.

On the expenditure front, Malaysia’s private consumption is expected to be the key driver of growth, underpinned by the better labour market conditions and recovering economy. This is reflected by the continued uptrend in retail sales (+29.6% YoY; 2Q22: +23.9% YoY) which was supported by wage growth, especially in the manufacturing sector (+6.7% YoY; 2Q22: +5.2% YoY). The unemployment rate has also continued to decline (3.7%; 2Q22: 3.9%), in line with the growing demand for labour and better income prospects. Meanwhile, Malaysia’s net export performance is also expected to give support to overall 3Q22 GDP, benefitting from the elevated commodity prices and robust demand, particularly for E&E products.

2022 GDP: Malaysia’s economy is expected to continue on its recovery path in view of the continued strength in domestic demand, spurred by the improving labour market. However, we still expect the growth momentum to slow down in 4Q22 as low base effect dissipates and external demand weakens. External headwinds such as a potential global slowdown due to continued tightening of monetary policies and broadening inflationary pressures, as well as further escalation of geopolitical tensions continue to pose downside risks. Nevertheless, we see upside to our 2022 GDP forecast following the better-than-expected economic releases thus far, coupled with the anticipated strong 3Q22 GDP posting. We maintain expectation for BNM to raise OPR by another 50bps by 1H23.

Source: Hong Leong Investment Bank Research - 10 Nov 2022