OVERVIEW

● Growth surprisingly slower. GDP growth slowed to 4.4% YoY in 3Q18 from 4.5% YoY in 1Q18, below both consensus median (Reuters) and house estimate of 4.6% and 4.9% respectively. On QoQ, it expanded by 3.8%, up from 1.7% in the 2Q18, and in line with the 10-year average of 3.9%, which might foretell a mild rebound as the current growth cycle could have reached its trough. Meanwhile, seasonally adjusted 3Q18 GDP grew 1.6% QoQ, a significant increase compared to 0.3% in the 2Q18.

● Domestic demand continues to remain the driver for 3Q18 growth. Domestic demand, excluding stocks, rose sharply by 6.9% YoY (2Q18: 5.6%), contributing 6.4 percentage points (ppt) to the overall GDP growth (2Q18: 5.2 ppts). This is mainly due to the strong expansion in private consumption (9.0% Vs. 8.0% in 2Q18) and investment (6.9% Vs. 6.1% in 2Q18). As a result, total private sector spending jumped 8.5%, highest since 1Q15 (9.6%), contributing 6.2 ppts to headline GDP growth. The sharp and sustained increase in private consumption was largely due to the three-month tax holiday marked by the abolishment of the Services Tax (GST) in June.

● …but dragged by falling exports and weak government spending. Meanwhile, trade tensions between US and China peaked in the 3Q18, which may have partly influenced a decline in exports (-0.8% YoY). Along with an increase in imports albeit slowing (0.1%), net exports saw a sharp decline of 7.5%, shaving off 0.7 ppt of the overall GDP growth. At the same time, fiscal consolidation and operating expenditure rationalisation brought about by the new administration continue to weigh on public sector spending, knocking off 0.4 ppt (2Q18: -0.7 ppt) from the total 3Q18 GDP growth. In addition, change in stocks contracted by a sharp 6.5%, cutting 1.4 ppts off from the overall GDP growth, suggesting the output of goods could not keep up with a large inventory drawdown due to increase in demand.

● Growth slack in the supply side due to commodity-specific shock may soon run its course. Output constraints and adverse weather conditions in the oil palm sub sector and weak rubber output performance continue to cause the agriculture sector to fall by 1.4% YoY (2Q18: -2.5%). We reckon the worse is probably over for the agriculture sector once the monsoon season is over by year end or early next year. However, the same can’t be said about the mining sector whereby high crude prices are not sustainable as supply remains relatively abundant and global demand is expected to wane in tandem with slower global growth. As in the preceding quarter, declining natural gas output following unplanned supply outages and pipeline repairs in Sarawak LNG facilities led the mining sector to fall by 4.6% (2Q18: -2.2%). Also import duties fell sharply by 33.3%, dragging the GDP growth down by 0.5 ppt.

● The services, manufacturing and construction sectors mitigates commodity-led supply shock. With a combined 83.6% share of total real GDP growth, the three sectors, led by the services sector continue to mitigate the slack in the GDP growth brought about by declines in mining and agriculture. The services sector expanded to a seven-year high of 7.2% in 3Q18, mainly attributable to expansion in the retail and wholesale trade, as well as the communication subsector. Meanwhile, the manufacturing sector’s growth edged up to 5.0% from 4.9% in 3Q18, on continued support from the electrical and electronics sector as well as from increased petroleum and chemical production. Despite the new government’s policy to review and defer some of the major infrastructure projects the construction sector’s growth remained stable at 4.6% (2Q18: 4.7%), contributing a steady 0.2 ppt to the overall GDP growth for the third consecutive quarter, underpinned by steady progress in existing transportation, petrochemical and power plant projects. However, residential sub-sector remained weak amidst the high number of unsold residential properties.

Source: Kenanga Research - 19 Nov 2018