• Real GDP posts a decade-high 10.1% in 1Q10, above consensus estimate of 8.8% (source: NST poll), but in line with our forecast of 9.8%. This sets the pace for a high growth for this year, which we had forecast at 8% in our recent report (See Economic Update 23 April 2010).
• Growth in 1Q was led by consumption spending (+5.4%), reflecting strong demand during the Chinese New Year festivities.
• Exports rebounded by 19.3%, underpinned mainly by E&E demand. Imports surged 27.5%, point to sustained exports.
• We do not see any serious threat of contagion from Euro debt crisis. Malaysia’s economic fundamentals have improved vastly amid low debt level. Nonetheless, Malaysia’s export potential may be hampered, if the crisis spreads to other developing economies, including China and India.
• Overall, we are more concerned with China’s slowdown. We see more risk from a property bubble in China, In our opinion, risk of an overheating economy is not there yet, with China’s growth (+11.9% in 1Q10) was still very close to average growth in the past few years.
• Malaysia has reduced its dependence on G3, as it has shifted its attention to new growth areas in Asia, in particular. Exports to China have been especially strong and thus, overtook Singapore to become Malaysia’s No.1 trading partner.
• We expect domestic demand to remain strong ahead. Sustained private consumption spending is supported by indicators, which have clawed back to pre-crisis levels: e.g. car sales were up 20% on 6-month moving average (6-MMA), bank loans rose 9-10% on 6-MMA; and tourist arrivals 11% on 6-MMA.
• The 1Q growth should in-fact vindicate Bank Negara’s decision to raise pre-emptively since March as well as yesterday’s hike. Bank Negara raised OPR by 25bps to 2.5% yesterday, and we expect the normalization exercise to continue in the second half-year. Two more hikes of 25bps will raise OPR to 3% by the year-end.
• On currency front, we HOLD our view that the MYR-USD will move to RM3.10 by end-2010.
Real GDP posts a decade-high 10.1% in 1Q10
In 1Q10, Malaysia’s economy expanded by a double-digit growth of 10.1 %YoY, driven by buoyant performance manufacturing and services sectors. On demand side, the growth was led by the private final consumption, gross fixed capital formation and exports.
The manufacturing sector surged to a double-digit growth of 16.9% YoY during the quarter, attributable to the strong growth in the sub-sectors of electric & electronic (+34.4%), transport equipment & other manufactures (+25.3%) and non-metallic mineral products, basic metal & fabricated metal products (+17.2%).
Meanwhile, the services sector expanded strongly by 8.5% YoY in this quarter, which was contributed by the sturdy trade related activities and domestic consumption. The wholesale & retail trade sub-sector continued to be the main impetus in the services sector with a significant growth of 9.6%, followed by the finance & insurance subsector (+6.4%), which benefitted from the increase in the total loans, deposits and insurance premium.
Growth momentum of the construction sector continued in this quarter by registering 8.7%, reflecting strong expansion in civil engineering and non-residential subsectors.
On demand front, consumption spending strengthened further by 5.4% in the first quarter, from 1.4% in 4Q09. The growth was driven by the private consumption (+5.1%) as a result of stronger spending on transport, housing & utilities, furnishing & household equipment and restaurant. Meanwhile, investment spending rose by 5.4% in the quarter, after a 8.2% growth in 4Q09.
In the external sector, exports posted an encouraging growth of 19.3%, underpinned largely by stronger demand for the products of electric & electronics, petroleum and chemical. Meanwhile, Imports experienced a rapid growth of 27.5%, supporting our view of sustained export activities in the future.
1Q GDP on track, to our full-year forecast of 8%
The 10.1% growth in 1Q10 beat street estimates of 8.8% (source: NST poll), but in line with our forecast of 9.8%, predicted three weeks ago.
The 1Q GDP, which was the strongest expansion in 10 years (+11.7% in 1Q 2000), set the strong foundation for the rest of year. Malaysia is on track to run at rapid pace, and so, we MAINTAIN our full-year forecast of 8% in 2010.
Export-driven growth to continue
We believe that intra- and inter-Asian exports will continue lead the way in the coming quarters, providing sufficient support to domestic GDP growth amid a weaker contribution from the exports to the industrial economies. We forecast exports to rise at least 15 to 16% this year, bulk of the expansion coming from electronic and electrical goods, which account for around 40% of total exports.
Overall, exports volumes are now back up to pre-crisis levels and this should continue to contribute strongly towards GDP in the coming quarters. Nonetheless, we remain concerned of recent developments in the Euro area.
Exports to US and Euro may be vulnerable but ...
We do not see any serious threat of contagion from Euro debt crisis. Malaysia’s economic fundamentals have improved vastly amid low debt level. Nonetheless, Malaysia’s export potential may be hampered, if the crisis spreads to other developing economies, including China and India. Since we have reduced our dependence on G3, we have shifted our attention to new growth areas in the region, Asia in particular. Exports to China have been especially strong; in 1Q, China overtook Singapore and became Malaysia’s most important trading partner.
More concerned with China risks
Overall, we are more concerned with China’s slowdown. We see more risk from a property bubble in China, In our opinion, risk of an overheating economy is not there yet, with China’s growth (+11.9% in 1Q10) was still very close to average growth in the past few years.
Business and consumer confidence high
Domestic demand should remain strong, with a return of business and consumer confidence in the economy. Better employment conditions, stable or higher income levels and uninterrupted credit flows should continue to support the expansion in demand. Recent data on business confidence and consumer sentiment indices from the Malaysian Institute of Economic Research point to investment continuing to climb at healthy rates. Imports of capital and intermediate goods have also picked up and are another factor, which suggests that investment growth will hold at a strong pace.
On consumer sentiments, selected private consumption indicators point to sustained consumer spending. Most indicators have climbed back to pre-crisis levels: e.g. car sales were up 20% on 6-month moving average (6-MMA), bank loans rose 9%-10% on 6-MMA; and tourist arrivals 11% on 6-MMA.
OPR raised second time this year
As expected, Bank Negara raised the overnight policy rate (OPR) by 25bp to 2.5% yesterday. The 1Q growth should in-fact vindicate Bank Negara’s decision to raise raise pre-emptively since March as well as yesterday’s hike. Given that the upswing set to remain moderately strong, BN may stay on-course for further normalisation, especially to contain the inflation build-up in the economy. We expect rates to move up by 50bp in two hikes before
Inflation has risen for the past four months and remains at 1.3% on average, still below pre-crisis levels. Low inflation now means that Bank Negara can move gradually, rather than not moving at all. Accelerating inflation risk appears to remain in the sytem more in the second half-year, given the base-effect. Therefore, we expect OPR to move towards 3.0% - still below neutral range but yet not suffocating economic activities.
Ringgit to move towards RM3.10 to USD by year-end
In April, the Ringgit (MYR) again outperformed other Asian currencies, in part due to the country’s continued surplus in trade as well as balance of payment; a shift in global investor risk appetite; expectation of further rate hikes; and prospects that China will soon relax the Renminbi peg against the US dollar. Key reason for this is a change in the MYR real effective exchange rate which, despite the sharp rise in the nominal value of the currency, has been in line with other currencies in the region. Accordingly, we HOLD our forecast that the MYR-USD will move to RM3.10 by end-2010.