Above expectations – Malaysia’s Real Gross Domestic Product (GDP) during 2Q19 surged to +4.9% y-o-y from +4.5% y-o-y during previous quarter. 2Q19’s GDP substantially surpassed ours and market expectation of +4.6% and +4.7% respectively. Most of the sectors from production side showed positive growths, led by Services and Manufacturing sectors as well as rebound in Mining sector. Moreover, Private consumption led the growth on expenditure side. For first half of 2019, Malaysian GDP grew +4.7% y-o-y as compared to +4.9% y-o-y during first half of 2018. However, seasonally adjusted real GDP in 2Q19 was little changed to +1.0% y-o-y (vs 1Q19: +1.1% y-o-y).

Positive growth seen in all sectors on production side - Mining and quarrying rebounded from contraction – Mining and quarrying halted its negative growth, which grew higher to +2.9% y-o-y (vs 1Q19: -2.1% y-o-y) after posting uninspiring growth since 2Q18. Growths in Mining and quarrying were buoyed by greater production of natural gas despite slower production of crude & condensate. Besides, Manufacturing and Construction sectors were up +4.3% y-o-y and +0.5% y-o-y respectively (vs 1Q19: +4.2% y-o-y; +0.3% y-o-y). Manufacturing sector was underpinned by exports-oriented industries such as E&E products: +4.1% y-o-y (vs 1Q19: +3.8% y-o-y), Petroleum, chemical, rubber & plastic products: +3.3% y-o-y (vs 1Q19:+3.1% y-o-y). Meanwhile, Construction sector was spurred by growth in Civil engineering (+5.4% y-o-y) and Specialized construction (+4.7% y-o-y). Services sector, the main contributor for production growth (57.2%), maintained its stellar growth which grew +6.1% y-o-y from +6.4% y-o-y during 1Q19, mainly lifted by growth in Wholesale& retail trade: (+6.7% y-o-y vs 1Q19: +7.2% y-o-y), Information & communication (+6.3% vs 1Q19: +7.2% y-o-y), Food & beverages (+9.4% vs 1Q19: +9.6% y-o-y) and Finance & insurance (+4.8% y-o-y vs 1Q19: +4.6% y-o-y). Agriculture wise, it eased to +4.2% y-o-y after turnaround from contraction in 1Q19 (+5.6% y-o-y). Moderated growth in Agriculture sector was due to decline in Forestry & logging and Fishing (-5.7% y-o-y and -5.4% y-o-y respectively).

Greater private spending lifted external demand – Private final consumption expenditure maintained as a key driver for demand side, growing +7.8% y-o-y as compared to +7.6% y-o-y in 1Q19, thanks to higher sub-sector growths such as by Food & non-alcoholic beverages, Transport and Restaurant & hotel. However, Public final consumption expenditure soothed to +0.3% y-o-y after posting a stellar growth of +6.3% y-o-y in the last quarter due to lower spending on supplies and services. Besides, Gross fixed capital formation (GFCF) narrowed its negative growth to -0.6% y-o-y as compared to -3.5% y-oy. Sluggish GFCF was weighed down by Machinery & equipment which was down by -4.2% y-o-y. Overall, GFCF was dragged down by Public sector (-9.0% y-o-y vs 1Q19: -13.2% y-o-y) which offset growth in Private sector (+1.8% y-o-y vs 1Q19: +0.4% y-o-y)

Stellar net exports – Exports maintained same growth as the previous quarter, which grew +0.1% y-oy (vs 1Q19: +0.1% y-o-y) while Imports widened its contraction to -2.1% y-o-y from -1.4% y-o-y in the prior quarter. Hence, net trade surged by double-digit growth to +22.9% y-o-y as compared to +10.9% y-o-y in the last quarter. We anticipate exports and imports to grow softer in 2H19 as we believe escalation from trade tension to continue and 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.

Foreseeing a soft growth in 3Q19 – Looking ahead, we envisage that the country will achieve moderate GDP growth in the following quarter as we expect 2H19’s economic expansion will remain tepid 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) and Mining sector, we believe Services, Manufacturing and Construction will remain subdued amid current domestic and global economic atmospheres. However, we believe Private consumption will grow at a healthy pace amid lower OPR coupled with lower inflation. Meanwhile, Public consumption is expected to escalate further thanks to 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 Sino-US trader war.

Source: JF Apex Securities Research - 19 Aug 2019