Real GDP Growth Rose Sharply to 6.2% Yoy in 3Q17

As expected, in tandem with the strength of the global economy, Malaysia reported a better-than-expected set of economic results in 3Q17, with the country’s real GDP growth rising further from 5.8% yoy in 2Q17 to 6.2% in 3Q17, higher than market expectations of 5.7%, reflecting a sustained economic momentum led by the global trade activity, which has spilled positively to the country’s private consumption and domestic demand growth.

Higher Private Consumption Supported by Labour Market Conditions

Private consumption rose higher during the quarter on the back of better labour market conditions, underpinned by better private sector wages and stronger employment growth. Private sector wage growth was sustained at 7.3% in 3Q17, driven by wage growth in both the manufacturing and services sectors.

Strong Manufactured Exports From Demand for E&E Products

Growth in exports of goods and services rose further from 9.6% yoy in 2Q17 to 11.8% in 3Q17, supported by improvement in exports of electrical and electronics (E&E) products. If not for strong exports in 3Q17, real GDP growth could have been lower than 6.2%, as growth in imports of goods and services rose sharply from 10.7% yoy in 2Q17 to 13.4% in 3Q17.

Maintaining Our GDP Growth Forecast at 5.5% in 2017 and 4.9% in 2018

BNM expects domestic demand in 2018 to be supported by continued improvements in income and overall labour market conditions. However, we believe the strength of the Malaysian economy depends on global growth, where BNM also cautioned that the downside risks arise mainly from uncertainty regarding the timing, pace and magnitude of the monetary policy normalisation in major economies, protectionism, and political uncertainty in parts of Europe.

Current Account Surplus Widened to RM12.5bn in 3Q17

The country’s current account surplus widened by RM2.9bn to RM12.5bn in 3Q17 (3.7% of GNI), as compared to RM9.6bn (3.0% of GNI) in 2Q17. The better-than-expected current account surplus was attributed to higher surplus in goods account, which rose sharply from RM27bn in 2Q17 to RM31.7bn in 3Q17, its highest level since 1Q12. Based on Malaysia’s macro fundamentals, with steady reserves, we believe Ringgit should appreciate gradually against the US$ by end-2017, trading at RM4.10/US$ and appreciate to RM4.05/US$ by end-2018 (RM4.16/US$ currently).

Inflation to average around at 2.5-3.0% in 2018, with some upside risk

We are maintaining our forecast for overall inflation at 3.5% for 2017 (2.1% in 2016), but with the possibly of headline inflation rising to the upper end of the official forecast range of 3 – 4%. However, with stable core inflation, and continued expansion in productive capacity to contain further increases, we expect the country’s headline inflation to average around 2.5-3.0% in 2018, but the trend will depend on the uncertainty in future global oil prices. Going forward, the BNM overnight policy rate (OPR) could rise by 25bps from the current 3% to 3.25%, in mid-2018. The wording of “BNM may consider reviewing the current degree of monetary accommodation,” included in latest MPC statement may reflect some concern on the strength of the global and domestic macroeconomic conditions on the country’s headline inflation.

Source: Affin Hwang Research - 20 Nov 2017