Exceeding market expectation – Malaysia posted 1Q2022 Real GDP of 5% yoy (vs 4Q21: 3.6% yoy) which is much better than the market expectation (mean: 3.1%). The better performance is due to increase in domestic demand as recovery of economic activity with the easing of containment measures, continued expansion in external demand and improvement in labour market. On the other hand, seasonally adjusted GDP increased 3.9% qoq (vs 4Q21: 4.6% qoq).

Growth on supply side… Service sector rose 6.5% YoY in 1Q22 (vs 4Q21: 3.2% YoY) in line with the recovery of economic activities. This was largely led by the transportation and storage sub-sector with double digit growth recorded at 25.8% YoY (4Q 2021: 11.8% YoY) attributed to the strong performance in all segments, particularly land and air transports. Apart from that, Food & beverage and accommodation sub-sector registered a double-digit growth as well, at 24.2% YoY (4Q 2021: 5.6% YoY) underpinned by robust performances in both segments. Nevertheless, Finance and insurance sub-sector decreased 1.0% YoY (4Q 2021: 3.8%). Mirroring previous quarter, Manufacturing Sector continued its growth in 1Q22 which posted a growth of 6.6% YoY as against 9.1% YoY in the previous quarter. The better performance was led by Electrical, electronic & optical products, non-metallic mineral products, and wood product. On the contrary, petroleum, chemical, rubber & plastic products fell 0.5% YoY. Meanwhile, Agriculture Sector recorded a marginal growth of 0.2% YoY against 2.8% YoY in the preceding quarter. The growth was held up by Oil palm sub-sector and Fishing sub-sectors which increased 3.9% (vs 4Q 2021: 4.8%) and 3.5% YoY (4Q 2021: -0.5%) respectively.

... but Mining and Quarrying as well as Construction remained in the red. Unfortunately, Mining and Quarrying Sector shrank further to 1.1% YoY from a decrease of 0.6% YoY in 4Q21. The major factor of the decline was due to oil and condensate sub-sector. However, natural gas remained positive this quarter. Construction Sector eased its contraction 6.2% YoY in comparison to -12.2% YoY in the previous quarter with seasonally adjusted +8.9% qoq (4Q21: -1.9%). The disappointing YoY performance was attributed by a slower in Civil engineering and Residential buildings activities. On the flip side, contraction was also cushioned by a better growths in non-residential buildings and specialised construction activities.

Stronger Demand side. The final consumption expenditure soared 5.7% YoY from 3.2% YoY in the preceding quarter. Private consumption edged up to 5.5% YoY mainly influenced by higher consumption on Communication and Food & non-alcoholic beverages. Furthermore, consumption on Transport and Restaurants & hotels registered strong growth in this quarter. As for Public consumption, it rose 6.7% YoY as compared to 1.6% YoY in the preceding quarter. The hike was mainly attributable to spending on supplies and services, mainly for health-related expenditure.

Gross Fixed Capital Formation (GFCF) posted a marginal growth of +0.2% YoY from -3.0% YoY in 4Q21. The increase was mainly due to Machinery & equipment, which accelerated to 12% YoY from 17.4% YoY in the fourth quarter of 2021 supported by the thriving in manufacturing sector. Nonetheless, Structure and Other assets posted a smaller contraction of 7.9% YoY (Q4 2021: -15.6%) and 0.9% (Q4 2021: -3.3%) respectively. Private sector of GFCF accounted for 80.8% of the total GFCF in 1Q22. The Private GFCF improved 0.4% YoY which was the main contributor of the positive momentum of total GFCF in the quarter. On the contrary, Public sector was down 0.9% YoY as compared to -3.4% in the previous quarter.

External trade continued to grow. Export eased its growth to 8.0% YoY. In terms of seasonally adjusted, Export grew 4% QoQ. The stellar performance of export was mainly contributed by robust external demand for E&E products and commodity-phase products mainly palm oil-based products. The exports of E&E products soared to record high due to robust demand of electronic integrated circuits underpinned by the global digitalisation environment. Meanwhile, Import extended its growth to +11.1% yoy and +8.5% qoq mainly contributed by import growth in Intermediate goods, Capital goods and Consumption goods.

Cautiously optimistic on the recovery amid external headwinds. The 1Q22 GDP expanded 5% YoY following the recovery of economic activities with the lifting of containment measurement. We expect the positive momentum will be continued in the remaining 3 quarters backed by the relatively low base effect, favourable government policies, improvement in labour market and reopening of international border started 1 April 2022. We expect the economic growth to be supported by further expansion in Service and Manufacturing sector for supply side and Private consumption on demand side. Nonetheless, the external downside risks could derail the recovery of the economic and dent the potential growth of FY22. Hence, we trim our full year real GDP forecast to +5.3% yoy from +5.8% previously after factoring in the Ukraine-Russia conflict and partial lockdown in China which adversely impact the global supply chain.

Coming inflationary pressure and on-path economic growth have prompted increase in OPR. The inflationary pressures caused by Ukraine-Russia conflict and global supply chain disruption coupled with the firmer domestic economic growth path have prompted Bank Negara to raise the Overnight Policy Rate (OPR) 25 basis points earlier than expected. The 1Q22 inflation rate was +2.2% yoy and in line our full year CPI forecast driven by the elevating commodity prices and disruption of supply chain. We expect BNM to raise another 25 bp in 2H22 to 2.25% OPR to tame the inflationary pressure and to strengthen the MYR.

Source: JF Apex Securities Research - 17 May 2022