Real GDP Growth Likely to Recover in 3Q18

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) rose by 1.5 percentage points to 51.2 in August, rising above the expansion 50-point mark for the second time since January 2018, and its highest level since November 2017. This was reflected in all its sub-components, namely output, new orders, employment, suppliers’ delivery time and stock of purchases during the month.

The August’s manufacturing PMI showed new orders rising for the first time in seven months, where according to IHS Markit, some respondents highlighted that customers placed their orders before the Sales and Service Tax (SST), which took effect beginning from 1st September 2018. The new export orders slowed down during the month. However, this was in contrast with Malaysia’s exports performance, which expanded by 7.6% yoy in June, from 3.4% in May, supported by higher demand for manufactured goods, especially for electrical & electronic (E&E) goods. As such, we believe Malaysia’s manufacturing PMI will hover around the 50-point threshold level in 3Q18, where Malaysia will likely benefit from new export orders from abroad, for electrical & electronic (E&E) related products. This was also reflected in Malaysia’s imports of intermediate goods, which rebounded to 3.1% yoy in June, after six months of contraction since December last year.

The country’s leading index (LI), an indicator designed by the Department of Statistics (DoS) to predict the direction of the economic activity, turned around from -1% yoy in May to 0.5% in June. Going forward, uncertainty in the external environment remains, especially risk of global trade war with China (Malaysia’s largest trading partner) and US. However, the economic impact has not been felt in China’s external demand, where China’s PMI rose from 51.2 in July to 51.3 in August.

Malaysia’s manufacturing PMI averaged about 50.5 in July-August, slightly higher than the average of 48.6 posted in 2Q18. With consumer spending boosted by the tax holiday period (as a result of the zero-rating of goods and services tax, which began in June 2018 and end at August this year), as well as the performance of Malaysia’s PMI and leading economic indicators (LEI), we expect the country’s real GDP growth will likely recover from 4.5% yoy in 2Q18 to around 5.0-5.2% estimated for 2H18, the country’s full year GDP growth to be around 5% projected for 2018 (5.9% in 2017).

Source: Affin Hwang Research - 4 Sept 2018