OVERVIEW

• Growth moderates. GDP growth moderated to 5.4% YoY in 1Q18 from 5.9% in 4Q17, below both consensus and our forecast of 5.6% and 5.7% respectively. On QoQ, it fell by 4.2% after it expanded by 3.1% in 4Q17. Meanwhile, seasonally adjusted 1Q18 GDP expanded by 1.4% QoQ, higher compared to 4Q17’s 1.0%.
• Domestic demand slows. Domestic demand growth moderated further in 1Q18 to 4.1% YoY (4Q17: 6.2%), contributing 3.8 percentage points (ppt) to headline GDP growth compared to 5.7 ppt in 4Q17. This is mainly due to a growth contraction 0.1% YoY in public spending in 1Q18 after an expansion of 3.4% in 4Q17. The consumption part of government spending slowed sharply to just 0.4% from 4Q17’s 6.8% while its investment side fell by 1.0% (4Q17: -1.4%). Unlike previous periods closer to or during an election year, it reflected restrained government spending. Fixed investment also contributed to the slower domestic demand, it moderated sharply to 0.1% YoY from 4.3% in 4Q17. Main support to domestic demand came from private consumption, growing 6.9% YoY in 1Q18, slightly lower than 7.0% in 4Q17. Meanwhile, net exports contributed a larger 4.0 ppts to GDP growth (4Q17: 0.2 ppt), the highest since 1Q10, as import growth contracted by 2.0% (4Q17: +7.3%), despite the moderation in export growth to 3.7% from 6.7% in 4Q17.
• Sector wise broadly lower. With the exception of the services sector, growth is slower on the supply side. The services sector growth expanded to 6.5% in 1Q18 from 6.2% in 4Q17 attributable to expansion in wholesale trade, government services, finance, and communication. The agriculture sector was the biggest loser as its YoY growth slowed sharply to 2.8% in 1Q18 from 10.7% in 4Q17 due to unfavourable rubber and palm oil production as well as base effect. Surprisingly, construction growth slowed to 4.9%, the slowest since 2Q11 despite ongoing major infrastructure projects and supposedly higher development spending ahead of the election. Meanwhile, manufacturing was expectedly lower and within our estimate of 5.3% (4Q17: 5.5%) reflecting the deteriorating global PMI condition and moderating exports’ growth.
• Downside risk ahead. As the change in government will likely put a damper on private investment due to policy uncertainty and disrupt public spending we see downside risks to our GDP forecast going forward. The only upside to growth could possibly be derive from higher private consumption following the government’s decision to scrap the Goods and Services Tax (setting its rate at zero on 1 June) and take its time to implement the sales and services tax. External factors may also weigh on growth mainly the expectation that exports would continue to slow on the back of the slowing global demand for consumer electronics especially mobile devices. Hence, we revise our 2018 GDP forecast to 5.1% in 2018 from 5.5% (2017: 5.9%). Nonetheless, there could be offsetting factors if the government takes an aggressive approach to review major infrastructure projects. It then can prioritise or strategically delay projects that have high import content as it did in the 1990s. Less import could help boost net exports and support GDP growth.
• Monetary policy to remain accommodative. Although the central bank has left interest rates unchanged since it raised the overnight policy rate (OPR) in January, the outlook for monetary policy may have turned considerably uncertain following the change in government. The biggest risk to the monetary policy outlook is that a post-election sharp decline in investment would exacerbate an economic slowdown. This may prompt BNM to loosen its monetary policy and cut interest rates. For now we are maintaining our view that the OPR will remain on hold until the end of the year.

Source: Kenanga Research - 18 May 2018