Above expectations – Malaysia’s Real Gross Domestic Product (GDP) in 1Q19 eased to +4.5% y-o-y from +4.7% y-o-y in 4Q18, substantially above our in-house and market forecasts of +4.0% y-o-y and +4.3 y-oy respectively. 1Q19’s real GDP was underpinned by rebound in Agriculture sector from production side as well as Private and Government spending from expenditure side. On a similar direction, seasonally adjusted real GDP in 1Q19 recorded a minimal growth of +1.1% as compared to +1.4% in 4Q18.

Turnaround in Agriculture underpinned 1Q19 growth in supply side – Agriculture sector remarked a positive growth in first quarter of 2019 to +5.6% y-o-y after showing its contraction for three consecutive quarters since 2Q18. The sharp rebound in agriculture sector was spurred by higher CPO outputs (1Q19: +10% y-o-y vs 4Q18: -2.9% y-o-y) as well as Rubber production (1Q19: +11.8% y-o-y vs 4Q18: -18.1% y-o-y). However, other sectors in production side showed moderate growth amid contraction in Mining & Quarrying. Mining & Quarrying widened its contraction to -2.1% y-o-y in 1Q19 from - 0.7% y-o-y following contraction in Mining production index (1Q19: -1.9% y-o-y vs 4Q18: -0.5% y-o-y). Among the sub-sectors which contributed to drop in mining production were crude oil & condensate and natural gas.

Easing momentum for Services, Manufacturing and Construction – Services sector which contributed 57% share from total GDP, soothing to +6.4% y-o-y in 1Q19 as compared to +6.9% y-o-y in 4Q19, no thanks to lower index of services (1Q19: +6.5% y-o-y vs 4Q18: +7.2% y-o-y). Slowdown in services sector was due to moderate growth in most sub sectors such as Wholesale & retail trade (1Q19: +28.5% y-o-y vs 4Q18: +28.8% y-o-y), Finance & insurance (1Q19: +11.8% y-o-y vs 4Q18: +11.9% y-oy) and Government services (1Q19: +14.4% y-o-y vs 4Q18: +16.3% y-o-y). Manufacturing wise, slowdown in manufacturing (1Q19: +11.8% y-o-y vs 4Q18: +11.9% y-o-y) was due slower manufacturing production index (1Q19: +4.0% y-o-y vs 4Q18: +4.5% y-o-y) due to moderate growth in export and domestic oriented industries such as Beverages & tobacco products (1Q19: +2.6% y-o-y vs 4Q18: +3.2% y-o-y) and Transport equipment, other manufacturing & repair (1Q19: +8.6% y-o-y vs 4Q18: +12.1% y-o-y). While for Construction, the sector registered a modest growth of +0.3% yo-y (vs 4Q18: +2.6% y-o-y) in view of subdued value of construction work (1Q19: +0.7% y-o-y vs 4Q18: +4.1% y-o-y) following slower momentum in Residential building (-7.2% y-o-y) and Non-residential building (-4.0% y-o-y).

Steady external demand – Private final consumption expenditure which was the key driver to the demand side, still registered the higher growth albeit in a modest mode, +7.6% y-o-y (vs 4Q18: +8.4% y-o-y), lifted by Food & non-alcoholic beverages, Transport and Restaurant & hotel. Meanwhile, Public final consumption expenditure also grew higher to +6.3% y-o-y from +4.0% y-o-y in 4Q18, underpinned by higher spending on supplies and services following continuation of some mega-projects. However, Gross fixed capital formation turned to red to -0.1% y-o-y as compared to +3.1% y-o-y in prior quarter. We also witness sluggish public investment (1Q19: -13.2% y-o-y vs 4Q18: -5.9% y-oy) as well as flattish private investment (1Q19: +0.4% y-o-y vs 4Q18: +5.8% y-o-y).

Unexciting net exports – Exports and imports grew at slower paces to +0.1% y-o-y and -1.4% yo-y respectively in this quarter (vs 4Q18: Exports: +3.1%, Imports: +1.8%). Both exports and imports performance were affected by moderation in external trade environment and slower imports of goods and services activities. As such, net trade eased to +10.9% y-o-y as compared to +17.5% y-o-y in the previous quarter. We reckon that exports and imports in 2019 could grow softly at +3.8% and +3.4% respectively, which is consistent with slowing global economic indicators. We believe overall external trade will remain positive, albeit at a slower pace, driven by the Manufacturing sector which is backed by resilient global trade activities and gradual recovery in commodity prices. However, we opine that the prevailing trade war between the US and China could potentially derail the global trade and hence affecting our export performance for 2019.

Expecting 4.8% GDP growth in 2019 – Looking ahead, we envisage that the country’s GDP will grow in a modest mode in 2019 as we expect economic expansion will be tapering due to gradual slowdown in global growth and lower commodity price which may affect the performance of external demand. Despite turnaround in commodity sector (Agriculture sector), we believe Services, Manufacturing and Construction will remain subdued amid current domestic and global economic atmospheres. However, we believe public consumption could escalate further amid revival on mega projects such as Bandar Malaysia and East Cost Rail Link (ECRL) thus spurring the country’s GDP. Therefore, we retain our GDP forecast growth of +4.8% (vs 2018: 4.7%). However, we foresee that external factors could still pose a downside risk to the nation’s GDP especially with the prevailing trader war between the US and China.

Source: JF Apex Securities Research - 17 May 2019