Malaysia: A huge downside GDP miss in the second quarter

Malaysia’s GDP growth slowed sharply to 4.5% year-on-year in the second quarter from 5.4% in the first. We expected 5.2%, only a modest decline and in line with consensus.

Looking at the breakdown, weak net exports were the main source of downside GDP surprise, contributing only 0.1 percentage point (ppt) to GDP growth as against 4ppt contribution in the previous quarter (see figure). As such, domestic demand returned to the driving seat, led by a 4.3ppt private consumption contribution, up from 3.7ppt in 1Q, while government consumption and fixed capital formation also contributed more than in the previous quarter. This left inventory as a net drag on GDP growth of 0.9ppt.

On the industry side, strong exports supported manufacturing growth, but services remained the main force behind GDP growth. Finance Minister Lim Guan Eng sees 2018 GDP growth at about 5%. The central bank (BNM) cut its forecast today to 5.0% from 5.5-6.0%.

The weak 2Q GDP report dents our full-year growth forecast. A month ago we revised it to 5.2% from 5.5%. We are now revising it still further to 4.5% as the global trade war will weigh on exports for the rest of the year, and the tight fiscal stance will limit government spending. On the flip side, the GST removal, low inflation, and improved real incomes of households should support consumer spending.

Reinforcing the weak external sector contribution to GDP growth, the balance of payments data for 2Q (also released alongside GDP data today) showed a significant narrowing in the current account surplus to MYR 3.9bn from MYR 8.8bn a year ago. The goods trade surplus remained strong though, as was evident from the monthly customs trade data. We have also cut our current account surplus forecast for the year to 2% of GDP from 3.5%, which will be a narrowing from 3% in 2017.