Below expectations – Malaysia’s Gross Domestic Product (GDP) in 2Q18 slowed down to +4.5% y-o-y as compared to +5.4% y-o-y in 1Q18. The result was below our in-house expectation and market consensus of +5.0% and +5.2% respectively. On the supply side, Mining & quarrying as well as the Agriculture sectors bogged down the performance of 2Q18 GDP, meanwhile, fall in net exports from the demand side was the culprit. After being seasonally adjusted, the nation GDP registered a growth of +0.3% as compared to +1.4% in last quarter. For the 1H18, GDP growth moderated to +4.9% y-o-y as compared to +5.8% y-o-y in 1H17.

Soothing performance on production side – The growth of Services remained unchanged at +6.5% y-o-y as compared to previous month (vs 1Q18: +6.5% y-o-y) mainly supported by wholesale & retail trade (+7.3% y-o-y vs 1Q18:+6.8% y-o-y) and information & communication (+8.6% y-o-y vs 1Q18:+8.3% y-oy). Hence, Services sector remained the main contributor for 2Q18 GDP, accounting for 55.3% of the total GDP. However, Manufacturing, Construction, Agriculture as well as Mining & Quarrying saw a decline in 2Q18. Manufacturing sector decreased to +4.9% y-o-y vs +5.3% y-o-y in the previous month mainly due to languid expansion in sub-sectors such as Petroleum, chemical, rubber & plastic products (+27.9% y-o-y vs; 1Q18: +29.8% y-o-y) and Transport equipment, other manufacturing & repair (+11.6% y-o-y vs; 1Q18: +10.7% y-o-y). Besides, Construction sector eased to +4.7% y-o-y (vs 1Q18: +4.9% y-oy), dented by Non-residential buildings and residential buildings which decline +4.6% y-o-y and +7.3% respectively. Besides, Mining and Quarrying sector tumbled to negative growth of -2.2% y-o-y vs +0.1% yo-y in 1Q18 due to decline in natural gas. In addition, Agriculture sector also tumbled mainly dragged by lower Oil palm (-6.0% y-o-y) and Rubber (-20.1% y-o-y).

Tax holiday to spur private consumption – Private Final Consumption Expenditure, which was the key driver to the demand side, remarked a robust growth of +8.0% y-o-y (vs 1Q18: +6.9% y-o-y). This was spurred by consumption of food & non-alcoholic beverages, communication as well as restaurants & hotel. We believe this was mainly aided by tax holiday as well as key events such as fasting month and Hari Raya Aidilfitri which helped to boost consumer spending. Besides, Public Final Consumption Expenditure expanded +3.1% y-o-y (vs 1Q18: +0.4% y-o-y) buoyed by higher spending on supplies and services. Meanwhile, Gross Fixed Capital Formation (Investment) accelerated to +2.2% y-o-y from +0.1% y-o-y in the last quarter. The stronger momentum was due to rebound in Machinery & Equipment (+3.0% y-o-y vs 1Q18:-3.6%).

Lower external demand weighed down exports – Exports depleted in 2Q18 to +2.0% y-o-y (vs 1Q18: +3.7% y-o-y) due to slower exports of goods and services. However, imports rebounded from negative trajectory to +2.1% y-o-y from -2.0% y-o-y in previous quarter due to improvement of imports to main nations. As such, net trade grew at -0.1% y-o-y as compared to +5.7% y-o-y in the previous quarter. We reckon that export and import growths will soften in 2018 amid high base recorded in 2017. However, we believe overall external trade will maintain its positive momentum, albeit at a slower pace, driven by manufacturing sector which is backed by resilient global trade activities and meaningful recovery in commodity prices. However, prevailing trader war between the US and China could derail the global trade and thus affecting our export performance.

Foresee a soft pick up in 3Q18 – Looking ahead, we envisage that the country will achieve moderate GDP growth in following quarter as we expect 2H18’s economic expansion will remain tepid. We expect Services and Manufacturing from supply side, whilst Private Final Consumption Expenditure from demand side to remain the key contributors to our nation’s GDP. We expect 2018 GDP growth to remain resilient amid at a modest mode. We cut our GDP forecast to +5.1% from +5.3% previously in line with current domestic demand and global economic outlooks. However, we foresee that external factors could still pose a downside risk to the nation’s GDP especially with prevailing trader war between the US and China.

Source: JF Apex Securities Research - 20 Aug 2018