Preview

• The latest quarterly indicator released by the Department of Statistics Malaysia (DOSM) showed the Volume Index of Services continued to grow but at a moderate pace of 5.0% YoY (143.1 points) in the second quarter of this year (1Q23: 8.8% YoY). On a quarterly basis, the services index declined by 0.6% QoQ (1Q23: 0.9% QoQ).

• Still, all sub-segment contributed to the increase, despite moderating from the previous quarter. Namely, the Wholesale & Retail Trade, Food & Beverages & Accommodation moderated by 4.6% YoY (1Q23: 10.0% YoY) followed by Information & Communication and Transportation & Storage (2Q23: 7.2% YoY; 1Q23: 8.4% YoY), Finance, Real Estate and Professional (2Q23: 2.4% YoY; 1Q23: 6.6% YoY) and Others Services (2Q23: 10.7 % YoY; 1Q23: 12.8% YoY).

• In light of a deceleration in the second quarter in comparison to its antecedent, we believe the services sector's growth in the 2Q23 real Gross Domestic Product (GDP) is poised to fall short of our initial projection of 5.2% YoY. Presently, our projections stand at 4.7% YoY, exhibiting a discernible decline from the preceding 7.3% YoY growth recorded in the first quarter of 2023.

• The services sector's tangible presence within the realm of real GDP has demonstrated an exceptional correlation coefficient of 99.6% with the Volume Index of Services, spanning from the first quarter of 2018 to the final quarter of 2022, thereby fortifying its fundamental and pivotal role within the economic landscape. Throughout the year 2022, the services sector's substantial contribution amounted to an approximate 58.2% share of the nation's overall GDP, underscoring its significance as a key driver of economic activity.

• Figure 3 provides a concise summary of other pertinent quarterly statistics for the second quarter of 2023. On a positive note, the real GDP (supply side) still exhibits resilience driven by expansions in key sectors such as the manufacturing sector, (24.2% of GDP in 2022) and construction (3.5% of GDP). Nonetheless, the pace of growth in these sectors was softer as compared to the previous quarter, coupled with contraction seen in agriculture and mining sectors

• On the demand side, our analysis suggests that private consumption, comprising 64.7% of GDP in 2022, continued to grow, albeit at a moderate rate. This observation aligns with the moderate performance of the Distributive Trade Index, which recorded an annual increase of 4.1% in 2Q23, versus the 9.5% YoY gain witnessed in the previous quarter. Additionally, the lower trade surplus during the second quarter of 2023, amounting to RM54.14bn (compared to RM64.39bn in 1Q23), is expected to impact the GDP performance for the period.

• In accordance with our previous estimations, the bulk of the economic data unveiled yesterday by the statistical department has furnished some clues that the 2Q23 real GDP could expand at a moderate pace. Significantly, this trajectory could potentially deviate from our earlier projections, leaning towards an outcome that falls beneath our initial anticipatory threshold of 3.2% YoY, possibly settling around the vicinity of 2.8% YoY.

• Given that the disparity between our expectations and the emerging data isn't of substantial magnitude, we are presently upholding our full year target of a 4.2% GDP growth rate for the year 2023. Any potential recalibration of our estimation will be deferred until the disclosure of the factual real GDP figure, which is scheduled for release on the 18th of August.

Source: TA Research - 10 Aug 2023