Malaysia’s real GDP growth slowed but remained steady at 4.5% yoy in 1Q19, slightly slower than 4.7% in 4Q18. Growth in domestic demand slowed from 5.7% yoy in 4Q18 to 4.4% in 1Q19, but private consumption remained supportive of economic growth, expanding by 7.6% yoy in 1Q19 (8.4% in 4Q18), led by steady income as well as employment growth. Going forward into 2H19, we believe private consumption growth will continue to be supported by healthy labour market conditions, as well as government measures including Bantuan Sara Hidup (BSH; second and third phases).

Malaysia’s Real GDP Growth to Expand by 4.5% Projected for 2019E

Domestically, aggregate domestic demand is expected to slow but remain healthy, from 5.5% in 2018 to 4.5% projected for 2019, driven largely by expansion in private consumption. We also expect the possibility of higher development expenditure by the federal government to support domestic demand. With the backdrop of continued uncertainty in the global economy, in preparing for the strategies for the 2020 Budget, which is scheduled to be tabled in Parliament on 11 October 2019, we expect the Federal Government to propose further measures to support the domestic economy.

Downside Risk on Exports From Global Trade Tension

For 2019, we expect Malaysia’s gross exports to expand by 2% (6.7% in 2018) and gross imports to expand by 3.4% for 2019 (4.9% in 2018). Malaysia’s trade surplus is expected at around RM110bn for 2019 (RM120.3bn in 2018), supported by its diversified export structure, steady commodity prices and healthy demand for manufactured goods. We expect the current account surplus to remain healthy at around RM30bn in 2019 (RM33.5bn or 2.4% of GNI in 2018). Overall, we expect Malaysia’s real GDP growth to slow from 4.5% yoy in 1Q19 to 4.4% in 2Q19, before recovering to 4.7% yoy in 2H19, with a full-year average of around 4.5% (4.7% in 2018), which is still at the mid-point of the official forecast range of 4.3-4.8%.

IMF May Cut Its Global GDP Growth Forecasts for 2019 and 2020

However, the downside risks remain with the escalating trade tension, where we believe that Malaysia’s external demand could be dampened on possible global supply chain disruptions. If rising US-China tariffs are implemented, taking into account previous trade measures by the US and China, the International Monetary Fund (IMF) has cautioned that the global growth projections for 2019 and 2020 will likely be revised down, which will also drag on our current base case assumption for Malaysia’s GDP growth for 2019 and 2020.

Shifts in Global Monetary Policy, Especially in the US

On the global monetary policy front, there is now a rising possibility of the US Federal Reserve cutting its policy rates following the change in tone at the FOMC Meeting in June. While the US Fed left its Fed funds rate (FFR) unchanged in the range of 2.25-2.50%, in its latest assessment, it made some changes and turned slightly more cautious in the statement on economic outlook, which we believe may pave the way for a potential 25bps rate cut in FFR as early as 4Q19. There may be possible more FFR cuts in 2020.

BNM to Maintain An Accommodative Monetary Policy

Domestically, we expect BNM to remain cautious on economic outlook as uncertainty in the external environment remains prevalent stemming from the unresolved trade tensions. With headline inflation remaining manageable, we expect BNM to leave the OPR unchanged at 3% in the three remaining MPC meetings on 9 July, 12 September and 5 November 2019, after the last 25bps cut at the meeting in May. The move to cut the rate could support growth in domestic demand, especially private consumption, from higher disposable income with slightly lower monthly mortgage repayments.

Source: Affin Hwang Research - 28 Jun 2019