OVERVIEW

● Growth slows further. GDP growth slowed to 4.5% YoY in 2Q18 from 5.4% YoY in 1Q18, below both consensus and house estimate of 5.2% and 5.3% respectively. On QoQ, it grew by 1.6%, slower than the 10-year average of 2.9% of all the 2Q growth rate, indicating a slower growth momentum ahead. Meanwhile, seasonally adjusted 2Q18 GDP grew 0.3% far lower compared with 1Q18’s 1.4%.

● Domestic demand up. The main driver for 2Q18 growth was domestic demand. Domestic demand expanded by 5.6% YoY (1Q18:4.1%) contributing 5.2 percentage points (ppt) to headline GDP growth compared to 3.8 ppts in 1Q18. This is mainly due to the strong expansion in private investment and consumption. In total private spending grew 7.5% (1Q18: 5.2%), contributing 5.5 ppts to headline GDP, partly due to the removal of Good and Services Tax (GST) beginning in June.

● …but government spending and external demand slows. Meanwhile, government spending, fell 1.4% YoY (1Q18: -0.1%), particularly influenced by the unprecedented outcome of the 14th General Election (GE14) in May that brought about a major change in the government. The slowdown in the global tech cycle along with the on-going global trade tension continue to weigh on exports. Hence, exports growth slowed to 2.0% from 3.7% in the 1Q18.

● Agriculture and mining a drag to growth. While the major economic sectors, notably the services and manufacturing, accounting for about 78.0% of GDP, remained supportive of growth, a commodity specific shock was a major reason for the slack in the supply side. Production constraints and adverse weather conditions in the oil palm sub sector and weak rubber output performance cause the agriculture sector to contract by 2.5% YoY (1Q18: +2.8%). Declining natural gas output following unplanned supply outages led the mining sector to fall by 2.3% (1Q18: -0.2%)

● The services sector continues to be the main driver for the supply side, growing by 6.5% in 2Q18, matching 1Q18 growth rate, mainly attributable to expansion in the retail trade, motor vehicles, transportation and storage sub sectors. Meanwhile, the manufacturing sector’s growth was expectedly lower at 4.9% (1Q18: 5.3%), reflecting the slower global demand for electrical and electronics goods. Partly affected by the new government’s policy to review and suspend some of the major infrastructure projects the construction sector’s growth slowed to 4.7% (1Q18: 4.9%).

● Momentum to slow further in 2H18. So far, the post GE14 period brought a mix impact on economic growth. Higher private consumption growth following the government’s decision to scrap the GST has so far been positive on growth. But lower fiscal spending and weak external demand continue to have opposite effect. This has resulted in the 1H18 GDP growth to moderate to 4.9% YoY (2H17: 6.1%). On the expectation that the growth momentum to slow further in 2H18 due to the impact of a weaker global trade because of the impact of trade war and further slowdown in domestic demand we are projecting economic growth to moderate to 4.7% in the 2H18. Hence, we are revising our 2018 GDP growth forecast to 4.8% from 5.1%. We are also revising our 2019 GDP forecast to 4.7% from 5.0% on the expectation of further slowdown in the global economy due to deterioration on global trade and a weaker US economy.

● Monetary policy bias to remain accommodative. Despite an increasing number of emerging market central banks raising interest rates triggered by a myriad of factors including Turkish Lira contagion, Brexit and the escalating USChina trade tension, we expect BNM’s monetary policy bias to remain accommodative. In fact, the prospect of further slowing of GDP growth may be of more concern and raise the probability of a rate cut going forward. We believe BNM’s pro-growth policy leaning remains dominant. Hence, we are maintaining our view that the Overnight Policy Rate (at 3.25%) will remain on hold until the end of the year.

Source: Kenanga Research - 20 Aug 2018