Data Highlights

• Based on the latest advanced estimates from the Department of Statistics (DOSM), Malaysia's Gross Domestic Product (GDP) increased 3.9% YoY to RM395.91bn in the first quarter of 2024. On a quarterly basis, the economy declined by 3.1% non-seasonally adjusted. The estimates came in below our target of 4.3% but matched median estimate in a Bloomberg survey. To note, the advanced estimate exclusively covers the five primary economic sectors of the supply side.

• The breakdown reveals that the majority of sectors experienced better growth, contributing to the overall economic upturn. Specifically, manufacturing (constituting 23.2% of GDP in 1Q24E) rebounded in the first quarter, reversing the contraction observed in 4Q23. Additionally, accelerated gains were observed in the mining (6.5% of GDP), construction (3.9% of GDP), and services (59.4% of GDP) sectors, while agriculture (5.8% of GDP) recorded a slower increase during the period.

• The preliminary 1Q24 GDP estimate released by DOSM lagged behind our optimistic forecast of a 4.3% YoY growth. Figure 3 below illustrates our anticipation for a notably stronger performance in the services sector during the first quarter. Our anticipation is based on the resilient performance of the labour market, manageable inflation rate and a sustained growth in personal spending. According to the latest data, Malaysia's unemployment rate held steady at the pre-pandemic level of 3.3% in February 2024. Concurrently, the distributive trade for both value and volume in Malaysia has gained momentum, experiencing a 3.9% and 5.5% YoY, respectively in the same month.

• The agriculture sector has also fallen below our initial expectations. Despite anticipating a growth rate of 2.0% YoY in 1Q24, the production data for Crude Palm Oil (CPO) has fallen short of our projections. Additionally, our assumption that the mining and construction sectors would experience moderate growth contrasted with DOSM estimates. Our manufacturing sector target remains within reach. To note, the period from January to February (quarter to date) witnessed an average YoY rise of 6.5% in IPI mining and 2.5% in IPI manufacturing.

• Observing the historical trend of DOSM's initial publications on Advanced GDP Estimates, it suggests a likelihood that the actual GDP later next month may align more closely with this lower level. Nevertheless, there is a possibility for positive contribution from the upcoming March data to enhance the first quarter reading.

• As of now, aside from the trade performance and CPO production, crucial indicators like Distributive Trade Index, Industrial Production Index, Construction Statistics and the Index of Services are yet to be published. The economic trajectory of these indicators presents a hopeful outlook for Malaysia to potentially achieve a more favourable figure in the first quarter, with the possibility of exceeding the initial anticipation. Any necessary adjustments to our data will be made during the release of the actual GDP, scheduled for 17th May 2024. Prior to that, we will also publish the 1Q24 GDP preview, incorporating the finalised readings for the aforementioned indicators.

• Amidst the current global landscape, the escalating geopolitical tension in the Middle East - the IranIsrael conflict emerges as a prominent downside risk that could potentially disrupt overall economic performance. The ongoing brinkmanship between Iran and Israel holds significant implications for international trade, especially concerning logistics and maritime operations. As these nations navigate their geopolitical differences, the stability of trade routes, shipping costs, and the smooth flow of goods face potential disruption.

• While there's a possibility of an impact on Malaysia's export performance, both Iran and Israel contribute minimally to Malaysia's exports. Based on data from UN Comtrade, Malaysia's total trade with Israel accounted for a mere 0.11% in 2022, with exports totaling USD465.93mn (0.2% of total exports) and imports at USD50.60mn (0.02% of total imports). Similarly, exports to Iran constituted approximately 0.2% (RM3.44bn in 2022), with imports from Iran contributing about 0.02% (RM20mn), as per data from the DOSM.

• Moreover, the specter of war and geopolitical tensions breeds uncertainty, unsettling financial markets and businesses alike. Investors, wary of risks, often seek refuge in safe-haven assets, while businesses may defer investments and expansion plans. This heightened risk perception prompts capital flight from affected regions, exacerbating economic strains. Reduced investment and consumer spending curtail economic activity, hindering growth prospects. The pervasive uncertainty undermines business confidence and long-term economic stability, perpetuating a cycle of stagnation.

Source: TA Research - 22 Apr 2024