Malaysia economy holding up well, HSBC Global Research says

The central bank said on Thursday for 2019, domestic demand will remain the key driver of growth though it was cautious about moderating global growth and its fallout on the local economy.

KUALA LUMPUR: Malaysia's GDP growth of 4.5% in the first quarter of 2019 shows the economy has been holding up relatively well by regional standards, HSBC Global Research said.

It said on Thursday while growth slowed from the previous quarter's 4.7%, 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”. 

However, on a more negative note, investment activity contracted sharply in Q1, it pointed out.

Bank Negara's GDP data showed private sector investment fell to 0.4% from 5.8% in Q4 last year and 1.1% a year ago. Public sector investment shrank significantly by 13.2% in Q1 of this year versus -5.9%  in Q4 of last year and  -1.3% a year ago.

HSBC Gobal Research said the Q1 2019 GDP growth of 4.5% on-year was in line with its expectations, but stronger than consensus of 4.3%. On a quarter-on-quarter seasonally adjusted basis, GDP expanded 1.1%, a moderation from the 1.3% pace seen in Q4 last year.

“Growth in Malaysia is gradually slowing in a broad-based manner; manufacturing growth has been resilient by regional standards.

“With growth likely to stay within Bank Negara's 4.3% to 4.8% forecast range this year, we do not forecast further rate cuts in 2019,” it said.

HSBC Gobal Research said manufacturing output expanded 0.9% q-o-q seasonally adjusted, an improvement from the 0.3% pace in Q4 last year.

“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,” it said.

Demand-side data showed private consumption expenditure slowed to 7.6% y-o-y, still above-trend. 

“With sequential growth rebounding slightly to 1.4% q-o-q (previous: 1.2%), 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,” it said.

HSBC Gobal Research pointed out the weakest part was investment. Gross fixed capital formation contracted by a sharp 3.5% y-o-y, the sharpest fall since 2009. 

Both public and private investment contracted sequentially (by 5% and 1%, 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,” it said.

HSBC Global Research said overall, growth was likely to weaken this year, but still track within Bank Negara's 4.3% and 4.8% forecast range (HSBC forecast: 4.5%). 

It also did not expect Bank Negara 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,” it added.