- After expanding strongly by 5.2% in 4Q11, the Malaysian
economy grew more moderately by 4.7% yoy in 1Q12, hampered by weakness in the
external sector. We had expected a
stronger showing of 5.0% for the quarter but were stymied by the sharp
moderation in exports. Moreover, the
change in base year from 2000 to 2005 also distorted our forecast.
- Growth in 1Q was primarily driven by domestic demand,
particularly investment. Investment
expenditure rose nearly doubled that of 4Q by 16.1% yoy, most likely on the
back of ETP and infrastructure projects like the MRT. Private consumption remained resilient,
rising 7.4% yoy in 1Q, little changed from 4Q.
Government spending did not keep pace with the double-digit growth of
the previous two quarters, instead expanding by a slower 5.9% yoy in 1Q. The weak external environment took a toll of
exports, resulting in an expansion of just 2.8% yoy vs. 5.5% in 4Q. On the supply-side, more moderate yoy growth
in the agricultural sector (1Q: 2.1%; 4Q: 6.9%), manufacturing (1Q: 4.2%; 4Q:
5.2%) and services (1Q: 5.0%; 4Q: 6.6%) helped to slow overall growth in the
quarter. Bright spots were mining, which recovered to expand 0.3% yoy in 1Q
from -3.8% in 4Q, and construction, which surged 15.5% yoy in 1Q vs. 7.5% in 4Q.
- On an even brighter note, headline inflation moderated to
1.9% yoy in Apr from 2.1% in Mar on the back of slower food price increases
(Apr: 2.3% vs. Mar: 2.9%) and lower transport cost (Apr: 1.0% vs. Mar:
1.3%). We continue to expect inflation
to average 2.7% in 2012, compared to 3.2% in 2011. However, there are upside to our forecast not
only from the implementation of minimum wage but also when civil servant pay
are raised, and in particular, when fuel subsidy are cuts (probably coming
after the general elections). These
could add 100-150 bps to our baseline forecast.
With growth coming in still relatively healthy this year and with upside
to inflation, we still think that there is a possibility that BNM would normalize
rates in the latter half of the year with a 25 bps h in the OPR.
- While the weakness in the external environment is a
downside risk for the economy, we believe that stronger government spending in
the quarters ahead plus the continued resilience in domestic demand should be
able to mitigate the weakness in external demand. We expect greater government spending on cash
handouts (including civil service pay increases and payouts to Felda farmers
etc.) and accelerated spending on infrastructure and ETP-related projects ahead
especially in the lead up to the general elections (which must be called by
early 2013). We think that 1QGDP
represents the bottom, and stronger growth is likely ahead. We are maintaining our real GDP growth
outlook at 5.2% for 2012 for the moment.
Source: OSK
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