Real GDP Growth Remained Strong in 2Q17, Supported by Exports

Following the strong domestic demand and export trends, despite the decline in growth in public investment, Malaysia’s real GDP growth rose further from 5.6% yoy in 1Q17 to 5.8% in 2Q17. This brought the accumulated average GDP growth to 5.7% yoy in 1H17 (compared with 4.0% in the corresponding period of 2016). When measured against the previous quarter, real GDP rose by 2.5% qoq in 2Q17 (-3.6% in 1Q17), reflecting the continued broad-based expansion in exports and private sector domestic demand.

Private Consumption and Investment Supported Domestic Demand

Despite the strong improvement in exports growth, the country’s domestic demand slowed from 7.7% yoy in 1Q17 to 5.7% in 2Q17, due mainly to the decline in growth in public investment. However, the country’s domestic demand was supported by total private sector expenditure in 2Q17, with private consumption expanding further by 7.1% yoy in 2Q17 (6.6% in 1Q17). Private investment, which accounted for about 75.4% of the total investment activity, remained the key driver of growth, expanding by 7.4% yoy in 2Q17, albeit slower than 12.9% in 1Q17, with continued investment activity from capacity expansion, machinery and equipment acquisition and replacements to cater for new orders.

Strong Growth Among Key Sectors of the Economy in 2Q17

On the supply side, the services sector remained the largest contributor to economic growth, with growth accelerating further from 5.8% yoy in 1Q17 to 6.3% in 2Q17, led mainly by wholesale and retail trade as well as the information & communication sector. The strength of the retail trade performance was the highest in nine years, mostly supported by higher household spending from a healthy labour market and wage growth. Growth in the manufacturing sector rose from 5.6% yoy in 1Q17 to 6.0% in 2Q17, attributed to higher production of E&E products, particularly semiconductors.

Domestic Demand Remains Driver of Economic Growth in 2H17-2018

Going forward, domestic demand is expected to remain supportive of economic growth, especially in 2H17 and 2018. However, we expect real GDP growth to increase at a slightly slower pace of around 4.8% yoy in 2H17 (5.7% in 1H17). The more moderate growth expected for 2H17 is mainly on account of the higher base effect in the corresponding period last year, while growth of both exports and domestic demand will also likely be lower in 2H17. We are maintaining our GDP growth forecast at 5.2% for the whole year of 2017, above the current official projection of between 4.3%- 4.8%. However, BNM has also acknowledged that the Malaysian economy will likely expand by more than 4.8% this year.

We Are Maintaining Our Real GDP Growth Forecast at 4.9% for 2018

Going into 2018, as the country’s economic expansion is becoming more broad-based, where real GDP growth will depend more on internally generated growth, especially from private investment and consumption, we are maintaining our 4.9% real GDP growth forecast for 2018. We believe the tax and expenditure programme of the 2018 Budget, to be announced on 27th October 2017, will likely have an expansionary impact on the country’s economy and domestic demand.

Real GDP Growth Remained Strong in 2Q17, Supported by Exports

Following the strong domestic demand and export trends, despite the decline in growth in public investment, Malaysia’s real GDP growth rose further from 5.6% yoy in 1Q17 to 5.8% in 2Q17, see Fig 1. This brought the accumulated average GDP growth to 5.7% yoy in 1H17 (compared with 4.0% in the corresponding period of 2016). When measured against the previous quarter, real GDP rose by 2.5% qoq in 2Q17 (-3.6% in 1Q17), reflecting the continued broad-based expansion in exports and private sector domestic demand.

Global trade activity remained strong in 2Q17, with Malaysia’s export growth expanding by 20.6% yoy in 2Q17 (21.3% in 1Q17), supported by exports of electrical & electronic (E&E) and exports of resource-based products. In particular, Malaysia’s exports of E&E products, which accounted for 38.3% of total exports, rose strongly from 18.4% yoy in 1Q17 to 22.6% in 2Q17, the third consecutive quarter of positive growth. This was in tandem with global semiconductor sales, which rose by 23.7% yoy to US$97.9bn in 2Q17 (US$92.6bn in 1Q17), the industry’s highest quarterly sales on record. As a result, real exports of goods and services rose by 9.6% yoy in 2Q16 (9.8% in 1Q17). However, real imports of goods and services also rose at a faster rate of 10.7% yoy in 2Q17 (12.9% in 1Q17). With exports exceeding imports during the quarter, the contribution of net exports to GDP turned positive to 0.1 points to GDP growth in 2Q17 (-1.2 points in 1Q17).

Source: Affin Hwang Research - 21 Aug 2017