OVERVIEW

Real GDP growth in 4Q16 was higher than expected at 4.5% YoY on the back of stronger external demand and private sector spendingFor the whole of 2016, GDP grew by 4.2%, slower than 5.0% in 2015.

Domestic demand resilient; external demand firming up. The private sector continued to support overall growth notwithstanding deterioration in public sector expenditure. On the external front, overall trade saw modest growth with exports rising faster than imports, hence providing some further support to growth

Broad based expansion led by services. Services sector led overall expansion in growth, up5.5%though its pace was more moderate relative to 6.1% in 3Q16. Agriculture sector was the only exception, though registering a smaller contraction of 2.4% (3Q16: -6.1%).

A brighter outlook. We are more upbeat on prospects for 2017 as the 4Q16 figures, along with other economic data, suggests a steadier growth momentum moving into 2017, specifically in 1H17. This further reaffirms our view of a 4.5% full year forecast for 2017 with potential upside.

Odds of OPR cut recede. With inflation creeping up – from further withdrawal of subsidies, fuel hikes and a more upbeat demand – along with the stronger recovery momentum, we believe that the odds for an OPR cut to be significantly lower.

Higher-than-expected growth, signals stronger recovery momentum. Real GDP growth expanded 4.5% in 4Q16 from 4.3% in 3Q16: 4.3%. The growth rate exceeds the median market consensus of 4.4% and the house forecast of 4.3%. On a QoQ basis, the GDP expanded by 1.4% after seasonal adjustment, similar to the revised QoQ figures of 3Q16. 4Q16’s growth brings the full year 2016 GDP growth to 4.2%, matching the house forecast, though slower than 2015’s 5.0% growth. The higher-than-expected growth rate suggests a stronger recovery momentum moving into 2016.

Private sector driving growth with support from external sector. On an expenditure basis, growth was again supported by private expenditure as public expenditure contracted. On the external front, the external sector saw a stronger expansion as overall trade rose during the quarter, suggesting possible further support from the previously soft external demand.

Private spending holding up. Private consumption expanded at still healthy 6.2%, just a touch lower than 6.4% in 3Q16, even as government consumption fell 4.2% (3Q16: +2.3%). Resilient private consumption growth, along with a 4.9% expansion in private gross capital formation (3Q16: 4.7%) suggests that sentiments may be biased on the upside, indeed, likely to remain so moving into 2017. Overall, however, private expenditure, which was unchanged at 6.0% YoY, contributed to just 3.8 percentage points (ppt) to GDP growth (3.2 ppts from consumption and 0.6 ppt from capital formation), down from its 4.3 ppts contribution in 3Q16.

Weaker public sector, however, weighed against overall growth. Public sector expenditure declined further to 2.6% YoY from -0.2% in 3Q16. This, on its own, knocked off 0.7 pp from 4Q16 growth, the first negative contribution to growth since 3Q14, reaffirming that the government remains committed to its fiscal consolidation path, as public spending on discretionary supplies and services – travel, and professional and consultancy services – was reduced during the quarter.

Inventories booster. Changes in inventories were positive in 4Q16, adding 1.0 ppt to growth. This suggests a possible build up in inventory though this could reflect errors and omissions inherent in the national account statistics. Nonetheless it boosted domestic demand growth to 4.4% from 4.1% in the 3Q16, contributing 4.1 ppts to GDP growth. Excluding inventories, domestic demand growth was just 3.3% (3Q16: 4.6%).

Stronger external demand. Exports and imports both expanded during 4Q16, pointing to a stronger external sector recovery moving into 2017. Overall, the net exports grew 5.8% (3Q16: 5.9%) as exports expanded faster than imports during the quarter. However, despite trade picking up, the external sector’s contribution to growth remains somewhat unchanged at 0.5 ppt.

Broad-based growth driven by services. By sector, growth was largely broad-based, with the exception of agriculture. Growth was largely driven by services and improvement in manufacturing as well as mining. The services sector expanded 5.5% YoY (3Q16: 6.1%), sustained largely by wholesale and retail trade (7.0% and 7.8% growth respectively), along with the information and communication (7.7%) and government services (4.1%). However, slower growth in the wholesale trade subsector (7.0% vs. 8.9% in 3Q16) along with slowdown in insurance subsector meant that growth in the services sector was more subdued relative to 3Q16. Despite the slowdown, the services sector remained the key growth driver, contributing 3.0 ppts to 4Q16’s growth (3Q16: 3.3 ppts).

The manufacturing sector continued to improve, expanding by 4.8% YoY (3Q16: 4.2%) with the electrical, electronic and optical manufacturing subsector, and the petroleum, chemical, rubber and plastic manufacturing subsector standing out as among the main contributor to manufacturing sector growth contributing to 0.5 ppts and 0.4 ppt of manufacturing growth respectively. Overall, manufacturing sector growth was largely broad-based, contributing 1.1 ppts to overall growth with just the transport equipment, other manufacturing and repair subsector contributing negatively to manufacturing growth (-0.1 ppt).

Construction sector growth eased in 4Q16 to 8.1% from 8.5% in 3Q16, a typical end of year brief winding down. Nonetheless, we still believe the sector would continue to be well supported by large civil engineering and residential property development over the next couple of years.

Gas boom. Meanwhile, the mining sector continued to accelerate into 4Q16, growing by a faster 4.9% (3Q16: 3.0%) and contributing to 0.4 ppt of growth. Growth in the mining and quarrying sector came as production in natural gas enjoyed considerable growth, a theme which is consistent with the subsector’s performance as measured by its industrial production index.

The agriculture sector growth remained subdued but contraction is less severe. It fell by 2.4%, largely from the sharp continued weaknesses in the palm oil sub-sector (and to a lesser extent, aquaculture). However, despite overall contraction in the agriculture sector, its deterioration was subdued with the rubber sub-sector showing mild growth after three quarters of deterioration. As a result, the agriculture sector’s knocked just 0.2 ppt off overall GDP growth in 4Q16 compared to 0.6 ppt in 3Q16.

OUTLOOK

Recovery momentum to buoy 2017 economy. With recovery momentum underway, we maintain our forecast of 4.4% YoY growth in 1Q17 to reflect seasonal effect on growth. It is expected to pick up to 4.7% in 2Q17, before tapering off into 2H17. Nevertheless, full year growth for 2017 is projected to accelerate to 4.5% from 4.2% in 2016.

External demand to pick up. While external trade has shown some signs firming up, we see some seasonal speed bumps that may result in overall deterioration of net exports. As such, we expect net exports to take a breather during 1Q17, cutting about 0.3 ppt of 1Q17 growth. On the domestic front, we are slightly more bullish. While we foresee public expenditure to remain tepid, we believe that private expenditure will help sustain growth, riding on the back of a recovery momentum.

Brighter prospects for 2017. We are cautiously upbeat on prospects for 2017, both on the domestic and external front. The deterioration of the public consumption, while shaving off a sizeable chunk off growth, may well moderate, if not reversed assuming improving fiscal space, at least from 1Q17 on the back of an improving economy and recovery of oil prices (at least for 1Q17). This, in turn, will allow the government sufficient room to step up expenditure while maintaining its fiscal consolidation objectives. Furthermore, we do see further upside on public expenditure, boosted by the possible triggering of a 2017 general elections. Assuming a steady cyclical recovery, there are some upsides to private demand though data on sentiments have been somewhat weak to middling. The slower deterioration of Malaysia’s January PMI figure, however, suggests that the downturn in Malaysia’s manufacturing sector may be due for a reversal, hence placing some upside on that sector.

Firming up but risk abound. The external sector, meanwhile, shows signs of firming up. We are somewhat encouraged by the stronger external trade figures towards the end of 2016 and the trade data coming out from January. This, along with signs of stronger global recovery, will reduce the strain on domestic demand. However, we are cautious on policy risks, particularly from the impact of the Trump presidency in the US. Nascent hotspots include possible threat of a potential “Grexit” which may result in contagion for some of the Euro Area countries, impairing growth somewhat – given the relative economic position of Greece vis-à-vis Britain; we deem the impact of a Grexit to have greater fallout on the European economies, potentially starving recovery in external demand.

Source: Kenanga Research - 17 Feb 2017