Malaysia’s Gross Domestic Product expanded 4.5 percent year-on-year (y-o-y) in the first quarter (previous: 4.7 percent, HSBC: 4.5 percent, Bbg: 4.3 percent). On a quarter-on-quarter (q-o-q) seasonally adjusted basis, GDP expanded 1.1 percent a moderation from the 1.3 percent pace seen in fourth quarter 2018 (Q418).
The 1Q19 GDP print reflects the fact that growth in Malaysia has been holding up relatively well by regional standards. While growth slowed from the previous quarter, the deceleration was quite measured, and the details suggest that manufacturing activity is holding up, private consumption should remain above-trend, and the commodity sector is recovering from disruptions in previous years. On a more negative note, investment activity contracted sharply in first quarter.
In the manufacturing sector, output expanded 0.9 percent q-o-q, an improvement from the 0.3 percent pace in 4Q18. This is in line with the strong industrial production data through March, and largely reflects the fact that Malaysia has received a relatively high share of manufacturing FDI in recent years, which has added to capacity.
We expect capacity additions to continue coming on line. In the short-term, Malaysia should see a boost in petrochemical production as the RAPID facility starts operating. Over the medium-term, we think that capacity additions are likely to continue given that Malaysia approved a record amount of FDI in 2018. This means that from an external perspective, real exports will hold up relatively well.
Services activity also rebounded on q-o-q terms, increasing 1.2 percent q-o-q from a weak print in 4Q18. This translated to growth of 6.4 percent y-o-y, in line with trend. This matches up with the private consumption trajectory. Demand-side data showed that private consumption expenditure slowed to 7.6 percent y-o-y, still above-trend. With sequential growth rebounding slightly to 1.4 percent q-o-q (previous: 1.2 percent), it is clear that consumer spending in Malaysia is alive and kicking. We expect private consumption to remain one of the key drivers of growth for the remainder of the year, driven by a stable labour market and expansionary fiscal policy.
The weakest part of today’s GDP print is investment. Gross fixed capital formation contracted by a sharp 3.5 percent y-o-y, the sharpest fall since 2009. Both public and private investment contracted sequentially (by 5 percent and 1 percent, respectively). This largely reflects downbeat domestic private business sentiment, as well as a lull in public infrastructure activity. With the resumption of some large-scale projects such as the East Coast Rail Link, we are likely to see some stabilisation in public investment towards the end of the year. However, we forecast overall investment to be a drag on growth this year.
Overall, growth is likely to weaken this year, but still track within Bank Negara Malaysia’s 4.3-4.8 percent forecast range (HSBC forecast: 4.5 percent). We do not expect BNM to deliver further rate cuts this year, and see the next cut only in 2020. That said, authorities will need to monitor the various downside risks on the horizon, especially following the latest escalation in US-China trade tensions.