HIGHLIGHTS

 The 3Q13 GDP expanded by 5.0% YoY following a slight upward revision of 4.4% (4.3% previously) in the previous quarter, making it spot on with our estimates and above market’s 4.8%. This is by and large the result of strong aggregate demand, spearheaded by robust private sector investment alongside a rebound in net exports. Overall aggregate demand grew by 8.3% following a revision of 7.4% (from 7.3%) in the 2Q13. Substantial increases in the construction, manufacturing and services sectors further reiterate overall GDP growth. Compared to the previous quarter, 3Q13 GDP expanded by 3.9% QoQ (2Q13: 3.3%) and by 1.7% on a quarterly seasonally adjusted basis (2Q13: 1.4%).

Supply Side

 With the exception of the mining sector, every other sector on the supply side registered growth acceleration in the third quarter. The manufacturing sector expanded by 4.2% from 3.5% previously. This contributed 1.0 percentage point (ppts) to overall GDP, compared to 0.9ppts in the second quarter. The main drivers were from the manufacturing of petroleum, chemical, rubber & plastic products (+5.9%), electrical and electronics (+3.7%), in line with a rebound in exports and transport equipment & other manufactures (+12.2%) on resilient domestic construction.

 As mentioned above, the manufacturing sub-sectors are in relation to solid growth of the construction sector, which managed to post a double-digit growth of 10.1% (2Q13: 9.9%) despite the high base effect. The main contributors to construction are residential construction (+21.2%), non-residential (+8.1%) and special trade (8.8%). Civil engineering however, eased to 4.4% (from 10.4%) as high impact projects have begun completion. The construction sector added 0.4ppts to GDP, same as the previous quarter.

 Services, the biggest contributor (55.1% share of GDP), expanded by 5.9% following a 5.0% growth in the preceding quarter, which contributed 3.2ppts (2Q13: 2.7ppts) to the GDP. Looking into detail, wholesale and retail trade was the main driver of the sector, spurred by all the sub-segments; retail (+7.8%), wholesale (+5.0%) and motor vehicles (+2.9%). Multiple public holidays in the 3Q13 (Eid, Merdeka, Malaysia Day) probably fueled additional spending to the evidently healthy consumer sentiment in the 3Q13. Communications increased by 10.8% whilst business services expanded by 9.4% on growth in professional and computer services. The finance and insurance sector posted a small growth of 0.8%, on a rebound in finance (+2.3% from -0.1%), probably partly due to the US Fed deciding to continue the QE programme, calming financial markets after prior volatility due to speculation of tapering. Insurance however, declined further by 4.1% from a fall of 0.3% previously.

 The agriculture sector grew by 2.1% (2Q13: 0.4%), supported mainly by production of food crops, which managed to offset a decline in rubber and palm oil. The sector added 0.2ppts to the GDP. Meanwhile, the mining sector moderated in the 3Q13, clocking a growth of 1.7% compared to 4.1% earlier. This is the result of smaller production of crude oil (-0.4%) and condensate (-3.9%). However, production of natural gas increased to 6.9%. The mining sector contributed 0.1ppts to the GDP compared to 0.3% in the 2Q13.

Demand side

 After four consecutive quarters of decline, exports of goods and services finally rebounded in the 3Q13, growing by 1.7% (2Q13: -5.2%). This added 1.6ppts to GDP compared to the 5.1ppts it shaved off in the previous quarter. Imports also recovered by the third quarter, expanding by 1.8% after declining by 2.0% previously. Overall net exports increased by 1.6% after contracting by 41.6% in the 2Q13.

 But what continues to be the backbone of growth for the economy is its domestic resilience, which has managed to buffer the economy from its once majority dependence on external demand. Total consumption grew at the same pace of 8.0%, which contributed 5.2ppts to the GDP. Private consumption expanded by 8.2% (2Q13: 7.2%), adding 4.3ppts to GDP whilst public consumption moderated to 7.8% from 11.8% previously, contributing just 0.9ppts. This scaling back in public spending is expected especially whence government debt has been highly critisised of late.

 Overall investment continues to plough through, as total gross fixed capital formation increased by 8.6% following the moderation of 6.0% in the 2Q13. This is mainly the result of better than expected private investment, which managed to post a double-digit expansion of 15.2% (2Q13: 12.7%) on investment on capital in the services and manufacturing sectors alongside on-going projects in the oil & gas sector. Public sector investment on the other hand remain in a contraction, though a smaller one of -1.3% compared to -6.4% previously. This is also by and large due to scaling back in spending in the effort to reduce public debts.

Outlook

 Overall 3Q13 growth is a sigh of relief, backing up our expectation for a more favourable 2H13 after the 1H13 registered a 4.3% growth. We believe that exports will continue to improve, though maybe at a slightly slower pace than we initially hoped due to the political snag in the USA in October. Similarly, recovery in the Eurozone faltered slightly, growing by just 0.1% QoQ on weaker German growth (0.3% from 0.7%) and a fall in France (-0.1% from 0.5%). However, the Eurozone’s yearly comparison saw a smaller fall of -0.4% compared to -0.7% on the 2Q13. Though Japan’s 3Q13 GDP expanded by 0.5% QoQ from 0.9%, there was a 2.7% YoY expansion (from 1.1%) and there’s an expected three-year high in Japanese exports in the month of October. China’s economy also posted an improvement in the 3Q13, growing by 7.8% YoY (2.2% QoQ), which will hopefully further improve following a pledge on expansion of economic freedom outlined in their plenum.

 In addition to external recovery, new projects under Budget 2014 and in preparation for Visit Malaysia 2014 will be additional fuel to domestic strength hence we are maintaining our 4Q13 optimistic outlook of a 6.3% growth, bringing 2H13 GDP to 5.7% and 2013 overall growth at 5.0%. This is likely to spill over into 2014 and following the announcement of the GST, we are looking at a rev up in both consumption and investment two to three quarters prior to its implementation in April 2015. Barring any unforeseen circumstances, we reckon 2014 GDP to grow between 5.0% to 5.5%. 

Source: Kenanga