● Growth moderated to a four-quarter low in 3Q19 (4.4% YoY; 2Q19: 4.9%), matching consensus and house estimate

- QoQ: climbed to a three-quarter high (3.3%; 2Q19: 2.1%).

- Seasonally adjusted QoQ: eased for the fourth straight quarters (0.9%; 2Q19: 1.0%), signalling subsiding growth momentum ahead.

● Weaker growth was evident across external and domestic fronts, with the latter led by public investment and private consumption

- Domestic demand (3.5%; 2Q19: 4.6%): weakest since 4Q16 (3.2%)

• Private spending (5.4%; 2Q19: 6.2%): eased on weaker private consumption (7.0%; 2Q19: 7.8%), as MIER Consumer Sentiment Index drifted further below the 100-point confidence threshold in 3Q19 (84 points; 2Q19: 93 points) and wage growth for both the services and manufacturing sectors tapered to 4.1% and 3.2% from 4.4% and 3.9% in the preceding quarter, respectively. Similarly, private investment withered to 0.3% (2Q19: 1.8%), way below the previous 3-year average of 5.9%, in line with the MIER Business Conditions Index which plunged to 69 points (2Q19: 94.2 points) suggesting a more wide-spread pessimism among businesses, amid heightened external uncertainties and bleak foreign demand.
   
• Public spending (-4.6%; 2Q19: -2.8%): steeper decline, in contrast to our estimate of -3.0%, attributable to further deterioration of public investment (-14.1%; 2Q19: -9.0%), as capital outlays fell amid slower-thanexpected resumption of construction of the revived infrastructure projects. This was partially offset by an improved public consumption (1.0%; 2Q19: 0.3%).

- Net exports (15.9%; 2Q19: 22.9%): trade tensions, tech downcycle and growth moderation in major economies weighed on trade performance.

• Exports (-1.4%; 2Q19: +0.1%): registered the second contraction in three years on marked drop in gross exports of E&E (-4.9%; 2Q19: -0.6%) and commodities (-12.8%; 2Q19: -0.6%).
• Imports (-3.3%; 2Q19: -2.1%): deeper deterioration due to negative turnaround in retained-imports (-4.9%; 2Q19: +6.3%), consistent with the subdued domestic demand.

● Sector-wise, growth moderation was observed across the board, led by the mining and manufacturing sectors

- Mining (-4.3%; 2Q19: 2.9%): flipped into a contraction, as crude oil production was disrupted by plant maintenance activities in East Malaysia.

- Manufacturing (3.6%; 2Q19: 4.3%): softened on tepid external demand, particularly for orders of E&E goods.

- Services (5.9%; 2Q19: 6.1%): slowed as lower growth in retail trade and finance outweighed improvement in wholesale trade.

- Construction (-1.5%; 2Q19: 0.5%): declined largely due to a major slowdown in specialised construction (0.9%; 2Q19: 4.7%) and non-residential segments (- 12.0%; 2Q19: -9.1%), amid commercial property overhang. Civil engineering, its biggest component, held up (4.7%; 2Q19: 5.4%) but on a downward trend due to the higher base effect.

- Agriculture (3.7%; 2Q19: 4.2%): eased on weaker oil palm production, reflective of the negative lag impact from the weak El-Niño phenomenon experienced since 4Q18 until 2Q19.

● GDP growth slowdown to extend into 4Q19 and 2020, with balance of risk remain tilted to the downside

- Continued elevated trade tensions, with the signing of the phase-1 US-China trade deal delayed and existing tariffs remain in place, exerting pressure on trade activities.

- Geopolitical disputes (eg. US-Iran, US-North Korea, Brexit) to uplift financial market volatility and global policy uncertainty, weighing on commodity prices and resulting in delayed global investment and asset allocation decisions in both advanced and emerging markets.

- These external factors would weigh on Malaysia’s growth prospect, albeit partially weathered by domestic activities, in particular through improved contribution from public investment as the revived infrastructure projects resume construction works, providing favourable spillovers to other supporting sectors.

- Against this backdrop, 4Q19 growth forecast maintained at 4.0% with a whole year projection of 4.5% (2018: 4.7%). As for 2020, growth is expected to moderate further to 4.3%.

● Heightened probability of a rate cut by the BNM in the 1H20, given the prevalent state of uncertainty in both the global and domestic economy

- With unfavourable economic data and prospects of deeper economic downturn, we opine BNM may want to act soon, with at least another rate cut of 25 basis points, bringing the OPR to settle at 2.75% by end-1Q20.

Source: Kenanga Research - 18 Nov 2019