• 4Q18 GDP growth expanded 4.7% y-o-y versus +4.4% in 3Q18

• Private sector spending will remain the main driver of GDP growth, amid lower public spending

• Overall, we maintain our 2019 GDP growth forecast of 4.5%

Highlights

Malaysia’s real GDP expanded at 4.7% y-o-y (3Q18: +4.4%) in the last quarter of 2018 versus 5.9% during the same quarter in 2017.

On a seasonally adjusted (SA) q-o-q basis, real GDP expanded by 1.4%, compared to 1.6% growth in the preceding quarter.

On the supply side, growth was driven by sustained output from Services (+6.9% y-o-y), Manufacturing (+4.7% y-o-y), Construction (+2.6% y-o-y) Mining and Quarrying (+0.5% y-o-y). In contrast, the Agriculture sector contracted 0.4% y-oy.

On the other hand, demand side GDP was supported by growth in all major types of expenditures – Private Consumption grew 8.5% y-o-y, Government Expenditure expanded 4.0% y-o-y, Investments grew 0.3% y-o-y and Exports of goods and services rebounded to 1.3% growth y-o-y.

At the same time, net exports of goods and services expanded 9.9% y-o-y, compared to a contraction of 7.5% y-o-y during the previous quarter.

On the balance of payment front, Malaysia’s current account surplus increased to RM10.8bn in 4Q18 (3Q18: RM3.8bn), which is equivalent to 3.4% share of total GDP (3Q18: 1.2% share of total GDP).

Our comments

Overall, Malaysia’s 4Q real GDP growth came in slightly above Bloomberg’s consensus forecast of 4.5% y-o-y. For full-year 2018, real GDP growth came in slightly higher at 4.7% y-o-y versus our house view of +4.6% y-o-y.

As expected, private consumption remains the main driver of growth (54.1% of total GDP); albeit expanding slower at 8.5% y-o-y in 4Q18 (3Q18: +9.0%) following the re-implementation of Sales and Services Tax (SST). This is mainly due to lower consumer spending as consumers have mostly made their purchases during the tax holiday period.

Moreover, private consumption growth moderated to 0.9% on a seasonally adjusted q-o-q basis (3Q18: +2.5%), below the 2015-2017 average SA q-o-q growth of 1.5%.

Meanwhile, gross fixed capital formation expanded at a slower pace of 0.3% y-oy (3Q18: +3.2%), mainly driven by a contraction in machinery and equipment of 1.5% y-o-y (3Q18: +5.9%), as well as moderation in structured assets growth (4Q18: +0.8% vs 3Q18: +1.8%).

However, as expected, private investment y-o-y growth remained resilient (4Q18: +4.4% vs 3Q18: +6.9%), while public investment remained weak (4Q18: -4.9% vs 3Q18: -5.5%) for the fifth consecutive quarter. This is in line with thegovernment’s aim to adopt fiscal prudence and reduce public spending in the upcoming quarters to meet fiscal obligations and pare down its high level of debt.

In terms of economic activity, the increase in GDP growth was mainly due to the Mining and Quarrying sector that rebounded by 0.5% y-o-y in 4Q18 (3Q18: - 4.6%). This is in line with a double-digit expansion in O&G-related exports by 24.8% y-o-y (3Q18: +8.7%).

On the external side, exports grew at a faster pace of 8.0% y-o-y in 4Q18, compared to 5.2% in 3Q18. Meanwhile, imports grew by 5.7% during the same quarter compared to 6.2% in 3Q18. Nevertheless, the higher exports growth may be due to a weaker average ringgit (4Q18: RM4.17 per USD) vs 3Q18: RM4.09 per USD) which could have boosted the attractiveness and demand for Malaysian manufactured goods.

Furthermore, headline inflation moderated further during the fourth quarter (4Q18: +0.3% vs. 3Q18: +0.5%). However, inflation will likely pick up moderately in 2019 as prices start to normalise after SST was reintroduced, with an expected inflation rate of 2.0% to 2.5% for 2019.

The 4Q18 Consumer Sentiment Index by MIER (Malaysian Institute of Economic Research) fell below the optimistic threshold level, coming in at 96.8 (3Q18: 107.5). The dip was mainly due to a fall in household income, accompanied with higher inflationary expectations due to the implementation of SST during September.

Besides, Business Condition Index by MIER also fell below the optimistic threshold level (100), coming in at 95.3 in the fourth quarter (3Q18: 108.8). This was mainly due to the gradual slowdown in production and trade in recent months, particularly the manufacturing sector.

Nevertheless, we are still confident that current fiscal reforms by the new government such as the gradual increment of the minimum wage, targeted fuel subsidy and repayment of corporate tax refunds will likely lead to favourable domestic demand conditions that will support Malaysia’s private consumption and investment growth. We forecast private consumption and private investment growth of 7.0% and 6.1% in 2019 respectively.

However, the moderation in the manufacturing sector’s production (mainly E&E production), in tandem with the slowdown of major advanced economies such as the US, China and Euro Area and a possible decline in contributions from the mining sector (increased volatility in commodity prices), will keep GDP growth subdued. Moving forward, we expect 2019 exports and gross fixed capital formation to register a more muted growth of 1.9% and 2.3% respectively.

Overall, we maintain our 2019 full-year GDP forecast at 4.5% y-o-y (2018: +4.7%), as we are mindful of lower government spending and slowing growth for the manufacturing and mining sectors.

Source: Alliance Research - 14 Feb 2019