• 2Q18 GDP growth plunges to +4.5% versus +5.4% in 1Q18 and +5.8% in 2Q17

• Ahead, private sector spending will remain the main driver of GDP growth, but no helping hand from public spending

• Cut 2018 GDP growth forecast to 4.8%

Highlights

Malaysia’s real GDP growth moderated to 4.5% y-o-y in 2Q18 versus 5.4% in the first quarter and 5.8% in the same quarter of the previous year. On a seasonally adjusted (SA) q-o-q basis, GDP growth expanded 0.3%, compared to a stronger 1.4% growth in 1Q18. .

On the supply side, growth was driven mainly by improvement in manufacturing (+4.9%), services (+6.5%) and construction (+4.7%) sectors. However, the mining and agriculture sectors contracted 2.2% and 2.5% respectively.

On the demand side, growth was largely supported by private consumption (+8.0%), private investment (+6.1%) and public consumption (+3.1%). However, public investments contracted 9.8% y-o-y which also marks the third consecutive quarter of decline.

Additionally, net exports of goods and services expanded significantly lower by 1.7% in 2Q18, from a 62.4% growth y-o-y in 1Q18.

Meanwhile, on the balance of payment front, current account surplus fell to RM3.9bn in 2Q18 (1Q18: RM15.0bn).

Our comments

Overall, Malaysia’s 2Q growth came in below Bloomberg’s consensus forecast of +5.2%.

As expected, private consumption remains the main driver of growth (55.2% of total GDP); expanding faster at 8.0% y-o-y in 2Q18 (1Q18: +6.9%) benefitting from one-month of tax-free period.

As the Goods and Services Tax (GST) was zero-rated effectively 1 June, we estimate some RM3.5bn was indirectly injected into consumers’ pocket, raising disposable income and consumer spending during the last month of the second quarter.

Moreover, private consumption grew faster at 3.0% on a seasonally adjusted qo-q basis (1Q18: +2.0%), suggesting that the underlying trend remains strong. In fact, MIER’s Consumer Sentiment Index surged to 132.9 in 2Q18, the highest since 1997 signalling positive consumer optimism on the 3 months tax holiday period before the re-implementation of Sales and Services Tax (SST).

Meanwhile, gross fixed capital formation continues to grow by 6.5% q-o-q (1Q18: +3.0%), mainly driven by stronger structure assets growth of 10.3% qo-q (1Q18: +4.0%), as well as other assets (2Q18: +12.2% vs 1Q18: +1.6%).

However, private investment growth moderates during the second quarter to 15.7% growth q-o-q (1Q18: +32.9%). The moderation was attributed to numerous uncertainties from pre- and post-GE14 period, and the reformations taking place by the new Pakatan Harapan (PH) government such as cancellation and postponing several mega projects, causing firms to trim their investments and costs.

On the public sector’s side, consumption rebounded by 8.3% q-o-q (1Q18: - 29.6%). However, public sector investment fell again 17.4% q-o-q (1Q18: - 34.9%), as the new government remains on track in its efforts to trim the total government debt level through review of infrastructure projects and cost rationalisation measures.

On the external side, exports rose by 8.3% in 2Q18, compared to 6.0% in 1Q18. Meanwhile, imports growth rebounded to 8.0%, in contrast to -0.3% in 1Q18 – suggesting that the impact of the US-China trade war on Malaysia’s trade remains muted for the time being.

Furthermore, headline inflation moderated further during the second quarter (2Q18: +1.3% vs. 1Q18: +1.8%), with an expected inflation rate of 2.0% for 2018 in view of easing inflationary pressures from a high base in 2017 and the implementation of zero-rated GST before the re-implementation of SST.

Current fiscal reforms by the new government such as GST removal and the standardisation of minimum wage across the country will likely provide favourable domestic demand conditions that will support Malaysia’s private consumption growth towards the end of the year.

We expect private consumption to remain expansionary, given that the remaining 2 months of the tax holiday period will likely continue to spur consumer spending, contributing positively towards 3Q18 GDP growth. We forecast a private consumption growth of 9% and 8.4% in 3Q18 and 2018 respectively.

However, the boost in private consumption growth is likely to be insufficient to keep Malaysia’s GDP growth above the 5.0% level. The moderation in manufacturing sector’s production (mainly E&E production) and possibly a drop within the construction sector due to the cancellation/postponement of mega projects will keep GDP growth subdued. Moving forward, we expect 2018 exports and gross fixed capital formation to register a more muted growth of 3.4% and 1.9% respectively.

Overall, we lowered our 2018 full-year GDP forecast to 4.8% y-o-y (previously +5.6%), as we are cautious on the back of lower government spending to offset the boost in private consumption growth in the near term.

Source: Alliance Research - 17 Aug 2018