OVERVIEW

● Growth moderated. GDP growth was back on a downtrend mode, easing to 4.5% YoY in 1Q19, after a short-lived acceleration of 4.7% in the preceding quarter, a tad above consensus and house estimate of 4.3% and 4.4%, respectively. On a QoQ basis, it declined by 4.3% from +3.5% in the 4Q18. On a similar direction, seasonally adjusted 1Q19 GDP softened to 1.1% QoQ from 1.3% in the 4Q18, indicating subsiding growth momentum ahead. Of note, the Department of Statistics had rebased the GDP from 2010 prices to 2015 prices.

● Growth weighed down by slowdown in both domestic and external demand. The predominant driver of the moderation came from domestic demand, mostly in the form of private investment, with its contribution to the overall GDP growth squeezed to 0.1 percentage points (ppt) (4Q18: 0.8 ppt) as its YoY growth slowed sharply to +0.4% (4Q18: +5.8%). This is reflected by the looming pessimism among businesses amidst elevated uncertainty with regards to the US-China trade negotiation, as indicated through the MIER Business Conditions Index which fell further below the optimism threshold of 100 points. (1Q19: 94.3 points; 4Q18: 95.3 points). As reported by MIER, going forward, businesses are expecting a decline in production given dismal new orders performance, particularly at the external front. On aggregate, the growth performance of domestic demand slowed to 4.4% in 1Q19 from 5.7% in 4Q18. In turn, its contribution to overall GDP growth shrank to 4.1 ppts from 5.2 ppts in the preceding quarter.

● Sustainable private consumption growth cushioned public spending shortfall. Meanwhile, private consumption sustained a commendable growth of 7.6% (4Q18: 8.4%), above the long-term average of 7.0%, despite moderating slightly, in part due to the normalisation of spending following the reinstatement of Sales and Services Tax (SST) in September 2018 after a three-month tax holiday period marked by the abolishment of the Goods and Services Tax (GST) in June 2018. On a similar trend, public spending charted a negative turnaround, contracting by 1.4%, after marking a flat growth in the preceding quarter. This was mainly underpinned by a steeper drop in public investment (- 13.2%; 4Q18: -5.9%), dragging the overall growth by 1.0 ppt (4Q18: -0.6 ppt), mirroring the prudent stance taken by the government with regards to public expenditure.

● Trade war, tech downcycle and weakening growth in major economies continued to weigh on exports. On the external front, exports slowed to 0.1% (4Q18: 3.1%), attributable to the current cyclical slowdown in the tech sector and hampered demand in major export markets, including China, US, and the EU. As imports decreased at a faster rate (-1.4%; 4Q18:1.8%) compared to exports, net exports contribution to growth narrowed to 0.9 ppt. (4Q18: 1.0 ppt).

● Agriculture rebound masked by tapered growth in other sectors. The quarter’s economic performance was pressured partly by the weaker contribution to growth in the services sector (3.6 ppt; 4Q18: 3.9 ppt), dragged by slower wholesale and retail trade. Deceleration was also observed in the manufacturing sector, with its growth easing to 4.2% (4Q18: 4.7%), as the export-oriented electrical and electronics (E&E) subsector moderated amid tepid external demand. In addition, the construction sector expanded at a much softer pace of 0.3% (4Q18: 2.6%), mainly on the back of a decline in the non-residential segment (-4.0%; 4Q18: 2.8%) and moderation in civil engineering (7.1%; 4Q18: 11.0%) sub-sectors. The waning activities were attributable to the yet unresolved oversupply condition in the commercial property segment as well as the suspension in mega infrastructure projects post-general election last year. Though most of the projects, such as the ECRL and Bandar Malaysia, have been revived recently, we foresee that the positive spill over to growth will only be more apparent in the 4Q19 onwards. Mining sector shrunk further, shaving off 0.2 ppt from the overall economy, on unfavourable crude oil and natural gas production due to unscheduled facilities shutdown. Bucking the overall trend, the agriculture sector leaped to 5.6% (4Q18: -0.1%), charting its first expansion after three consecutive quarters, propped up by a recovery in the palm oil and rubber output, as adverse weather conditions ceased and as demand condition improved following the slash in India’s palm oil import duty and implementation of higher biodiesel blending mandate in Indonesia and Malaysia.

● GDP growth to extend its slowdown into the 2Q19 and beyond on continued headwinds to growth. Downside risks to growth remain, emanating mostly from amplified uncertainties globally. These among others include the development of the US-China trade negotiation. The final outcome remains vague as Trump hiked tariffs on USD200b of Chinese goods to 25% from the previous level of 10% and initiated the process of enacting tariffs on the remaining USD300b of Chinese imports, while China retaliated by ratcheting up tariffs on USD60b of US goods to a range of 5-25% (previous: 5-10%). The pace of economic moderation in major global markets, in particular China and the US, is also part of the risks ahead. Given this backdrop, we maintain our expectation for further economic slowdown in the 2Q19, with GDP growth forecasted to register at 4.2%, adding to our whole year projection of a softer growth of 4.5% (2018: 4.7%).

● Monetary policy to remain accommodative. In line with expectations, BNM slashed the OPR by 25 basis points to 3.00% at its Monetary Policy Committee meeting last week, citing the goal of preserving the degree of policy accommodativeness against the global backdrop of moderating underlying economic conditions. Barring a major external shock, we expect the OPR to remain at 3.00% this year, amid stable core inflation.

Source: Kenanga Research - 17 May 2019