Higher Economic Growth Supported by External Demand

After slowing down for two consecutive quarters since 2Q18, Malaysia’s real GDP growth rose steadily to 4.7% yoy in 4Q18 (4.4% in 3Q18), higher than market expectations of 4.5%. In line with our expectation, the better-thanexpected GDP growth was due to higher contribution from net exports to GDP, which turned around and expanded by 0.8 percentage points in 4Q18, as compared to the negative contribution of -0.7 percentage points in 3Q18, with exports growth improving significantly as compared to imports growth in 4Q18. From the supply side, higher economic growth was attributed to growth in mining sector, as reflected in the strong output of the liquified natural gas (LNG) sector. On a quarter-on-quarter seasonally adjusted basis, real GDP growth expanded by 1.4% in 4Q18 (1.6% in 3Q18). For the full year of 2018, Malaysia’s real GDP growth slowed from 5.9% in 2017 to 4.7%, but growth in private consumption remained the main driver of growth, rising from 7.0% yoy to 8.1% during the same period.

Private Consumption Remains Healthy Despite the Reintroduction of SST

Growth in domestic demand slowed from 6.9% yoy in 3Q18 to 5.6% in 4Q18, due mainly to the slower gross fixed capital formation (GFCF). However, growth in private consumption remained strong at 8.5% yoy in 4Q18 (9% in 3Q18) even after the end of tax holiday period in 1st September 2018. This reflected that households, despite having frontloaded some of their spending in 3Q18, have not cut back their purchases sharply in 4Q18 (after the reintroduction of sales and services tax) as earlier feared, due to the country’s healthy income and employment growth, supported also by Government measures such as cash assistance and special payments to civil servants and pensioners. Growth in public consumption slowed from 5.2% yoy in 3Q18 to 4% in 4Q18, due to some cutback in spending for supplies and services.

Growth in total investment also slowed sharply from 3.2% yoy in 3Q18 to 0.3% in 4Q18, due mainly to slower private investment growth, which fell from 6.9% yoy in 3Q18 to 4.4% in 4Q18, where capital spending across major economic sectors. However, growth in public investment contracted by -4.9% yoy in 4Q18 (-5.5% in 3Q18), which reflected lower capital spending by public corporations. For the whole of 2018, growth in gross fixed capital formation slowed sharply from 6.2% in 2017 to 1.4%, with both private and public investment growth slowed to 4.5% (9.3% in 2017) and -5.2% (0.1% in 2017) respectively. Going forward, we believe growth in total investment will likely recover, as delay or postponement in some infrastructure projects last year, may be carried out this year, possibly translating into improvement in public investment in 2019, supported by government’s development expenditure.

Source: Affin Hwang Research - 15 Feb 2019