Real GDP accelerated to +14.2% YoY (2Q22: +8.9% YoY), slightly above our forecast of +14.0% YoY and surpassing consensus estimate of +12.5% YoY. Growth was seen across the board, particularly in the services and manufacturing sectors. On the demand front, growth was underpinned by strong private consumption and gross fixed capital formation. Following these developments, we revise our 2022 GDP forecast to +8.2% YoY (previous: +6.5% YoY) and 2023 GDP forecast to +4.2% YoY (previous: +4.5% YoY).

DATA HIGHLIGHTS

In 3Q22, real GDP accelerated to +14.2% YoY (2Q22: +8.9% YoY), slightly above our forecast of +14.0% YoY and surpassing consensus estimate of +12.5% YoY. Against the vibrant economic backdrop and pickup in tourism -related activities, GDP recorded another three consecutive months of strong growth (Jul: +15.8% YoY; Aug: +15.3% YoY; Sep: +11.6% YoY), though largely lifted by low base effect. Meanwhile, GDP eased on a quarterly sa basis (+1.9%; 2Q22: +3.5%).

On the demand front, growth was mainly driven by the continued strength in private consumption (+15.1% YoY; 2Q22: +18.3% YoY ), albeit at a softer pace, and higher gross fixed capital formation (+13.1% YoY; 2Q22: +5.8% YoY). Public consumption also picked up pace (+4.5% YoY; 2Q22: +2.6% YoY), and restocking activity (+0.8ppt; 2Q22: -1.0ppt) and net exports (+1.0ppt; 2Q22: -1.7ppt) contributed positively to overall GDP.

I. Private consumption remained robust at +15.1% YoY (2Q22: +18.3% YoY), supported by higher spending in recreation services & culture (+76.1% YoY; 2Q22: +75.1% YoY), as well as in restaurants and hotels (+43.3% YoY; 2Q22: +36.7% YoY). Clothing & footwear also saw stronger growth (+22.2% YoY; 2Q22: +22.1% YoY). The continued strength in consumer spending was mainly attributed to the improving labour market conditions and income prospects, coupled with the reopening of tourism activities;

II. Gross fixed capital formation accelerated (+13.1% YoY; 2Q22: +5.8% YoY), following higher investment in both structures (+16.7% YoY; 2Q22: +3.8% YoY) and machinery & equipment (+10.7% YoY; 2Q22: +9.6% YoY). Sectorial wise, private investment grew at a faster pace (+13.2% YoY; 2Q22: +6.3% YoY), driven mainly by higher capital expenditure concentrated in services and manufacturing firms. Public sector investment also trended higher (+13.1% YoY; 2Q22: +3.2% YoY).

III. Public consumption recorded faster expansion (+4.5% YoY; 2Q22: +2.6% YoY), on account of higher spending on supplies & services.

IV. Meanwhile, net exports recovered, contributing positively to overall GDP (+1.0ppt; 2Q22: -1.7ppt) amid higher exports (+23.9% YoY; 2Q22: +10.4% YoY) and imports growth (+24.4% YoY; 2Q22: +14.0% YoY).

On the supply side, growth was seen across the board, particularly in the services and manufacturing sectors.

I. The agriculture sector posted a small rebound of +1.2% YoY (2Q22: -2.4% YoY), driven mainly by the upturn in palm oil production (+5.1% YoY; 2Q22: -3.9% YoY) amid waning labour shortage issues, although gradual, and improved yields following higher rainfall earlier in the year;

II. The mining sector also rebounded (+9.2% YoY; 2Q22: -0.5% YoY), as production picked up pace in both natural gas (+13.6% YoY; 2Q22: +0.4% YoY) and crude oil (+2.5% YoY; 2Q22: -2.8% YoY). Growth was also partly lifted by base effects resulting from maintenance-related closures last year.

III. The manufacturing sector advanced strongly to +13.2% YoY (2Q22: +9.2% YoY), underpinned by continued demand for E&E and other consumer-related products. This is reflected by the ramp up in production for electrical, electronic and optical products (+17.3% YoY; 2Q22: +15.5% YoY), as well as for motor vehicles and transport equipment (+41.5% YoY; 2Q22: +21.2% YoY), partly higher to meet the high backlog in orders. Production for refined petroleum products (+10.5% YoY; 2Q22: +2.8% YoY) and plastic products (+5.2% YoY; 2Q22: +4.1% YoY) also picked up;

IV. The construction sector continued on an uptrend (+15.3% YoY; 2Q22: +2.4% YoY) following stronger growth across all sub-sectors; non residential buildings (+30.5% YoY; 2Q22: +10.1% YoY), residential buildings (+9.8% YoY; 2Q22: +2.7% YoY), civil engineering (+10.1% YoY; 2Q22: -8.2% YoY) and specialized construction activities (+13.7% YoY; 2Q22: +7.0% YoY).

V. The services sector also strengthened further to +16.7% YoY (2Q22: +12.0% YoY), propelled by the better labour market conditions and continued recovery in the tourism industries. Growth was mostly broad based; particularly in accommodation (+294.7% YoY; 2Q22: +139.2% YoY), motor vehicles (+142.2% YoY; 2Q22: +66.3% YoY), transportation & storage (+41.4% YoY; 2Q22: +35.8% YoY) and business activities (+35.4% YoY; 2Q22: +16.7% YoY). Food & beverages (+31.0% YoY; 2Q22: +24.5% YoY) and retail trade (+28.0% YoY; 2Q22: +21.6% YoY) also saw higher growth.

Current account (CA) surplus widened to RM14.1bn or 3.1% of GNI (2Q22: RM4.4bn or 1.0% of GNI), on account of the higher surplus registered in the goods account (RM43.0bn; 2Q22: RM34.0bn). The services account also recorded a smalle r deficit of -RM9.6bn (2Q22: -RM12.3bn) mainly due to higher travel and transport receipts, following the improvement in inbound tourist arrivals. Meanwhile, the primary income account deficit widened (-RM17.2bn; 2Q22: -RM14.7bn) owing to lower investment income generated by Malaysian firms investing aboard.

HLIB’S VIEW

Following the strong 3Q22 GDP posting and better-than-expected economic releases thus far, we revise upwards our 2022 GDP forecast to +8.2% YoY (previous: +6.5% YoY). Although we still expect growth to moderate in 4Q22, following the absence of base effect and weakening external demand, the economy is expected to continue to be supported by domestic demand amid the improving labour market situation. Meanwhile, following the darkening global outlook, we downgrade our 2023 GDP to +4.2% YoY (previous: +4.5% YoY). This is still in line with the official forecast range of 4.0% - 5.0% YoY.

BNM reiterated that the Malaysian economy will continue to be supported by firm domestic demand for the rest of the year. The economy will continue to expand, albeit at a softer pace in 4Q22, reflecting the more challenging global environment and dissipating base effect, consistent with our view. For 2023, BNM also expects the economy to continue to be supported by domestic demand and further improvements in the labour market. Meanwhile, headline inflation is expected to moderate but remain elevated in 4Q22, while core inflation is anticipated to remain high for the rest of the year. Going into 2023, both headline and core inflation are expected to remain high amid both demand and cost pressures and possible adjustments to domestic policies. Taking these developments into account, we expect BNM to raise OPR by another 50bps by Mar 2023.

Source: Hong Leong Investment Bank Research - 14 Nov 2022