Malaysia’s slowdown in 2H imminent — Analysts

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KUCHING: Malaysia’s growth is expected to slow down further in the second half of 2022 (2H22), analysts at RHB Investment Bank Bhd (RHB Investment) observed in its Economics View report.

“A 2H22 slow-down in economic activity is imminent, but what is the pace of slow-down is unclear. In our view, our first reading of the situation is that it could be faster than what Bank Negara Malaysia (BNM) or the market expects.

“From our proprietary machine learning derived database, we are noticing that in the third quarter of 2022 (3Q22) economic activity has started with a significant slow-down in headline and manufacturing IP, slow-down in construction, and slow-down in consumption in July. External sector activity remained strong in July,” the research team highlighted.

It explained that the balance of risks to its 2022 GDP growth forecast of 5.3 per cent y-o-y is tilted to the upside given today’s 2Q22 GDP print of 8.9 per cent y-o-y versus our forecast of 6.1 per cent and the Bloomberg consensus estimate of seven per cent.

Malaysia’s recently announced 2Q22 GDP print paints a mixed picture since on a quarter-on-quarter (q-o-q) basis, private consumption and investment slowed, while net exports and government spending accelerated.

In addition, it noted that inventory build-up during the quarter accelerated significantly, following the strong print in 1Q22 as well.

“So we have had a very strong 1H22 where companies have been re-stocking on back of expectations of a solid recovery in domestic and external demand,” it said.

“What concerns us for the 2H22 GDP outlook is will this pace of inventory build-up continue, why is private consumption and investment already slowing on q-o-q basis, June GDP printed 16.5 per cent y-o-y (and not due to base effects since June 2021 printed a huge print as well) versus May five per cent and April 5.6 per cent so was the June print a one off or more sustained in nature, and we notice large statistical discrepancies between the demand side GDP data (where most sectors, except government spending and net exports, slowed) and supply side GDP date (with the exception of the mining sector) accelerated on a q-o-q basis,” RHB Investment remarked.

On Malaysia’s performance in 2Q, the research team noted that on y-o-y basis, the economy has registered an expansion of around 6.9 per cent in 1H22.

“The robust y-o-y growth in 2Q22 was lifted partially by the low base from the Full Movement Control Order (FMCO) in June 2021.

“On q-o-q NA basis, the GDP rebounded by 1.7 per cent in 2Q22 versus a decline of 3.0 per cent q-o-q in 1Q22,” it added.

On the GFCF, it expected a slower momentum ahead with downside risks from lower structure investments (accounts for around 50 per cent of the total GCFC), with the possibility of slower progress or delays in some mega infrastructure projects.

 

 

“Furthermore, the uncertainties in global landscape amid slower growth in major economies coupled with unfolding development of geopolitical tensions and slowing commodity prices are likely to exert some downside pressures on the exports as well.

“Thus, we anticipate a further slowdown in the upcoming quarters amid headwinds from both domestic and external fronts,” it said.

In 2Q22, the domestic demand registered a higher y-o-y growth of 13.0 per cent (1Q22: 4.4 per cent) as consumer spending gained pace to 18.3 per cent (1Q22: 5.5 per cent).

Meanwhile, government spending moderated to 2.6 per cent y-o-y (1Q22: 6.7 per cent), weighed down by lower supplies and services spending, reflecting smaller Covid-19 related expenditure. Gross fixed capital formation (GFCF) registered a higher growth of 5.8 per centy-o-y (1Q22: 0.2 per cent) as capital spending by both private and public sectors improved on y-o-y basis. The trade performance remained robust for the quarter with gross exports grew by 30.0 per cent (1Q 2022: 22.0 per cent) while gross imports increased by 36.1 per cent (1Q22: 25.2 per cent).

On sectorial basis, key economic sectors continued to expand in 2Q22 with services sector grew by 12.0 per centy-o-y (1Q22: 6.5 per cent).

Consumer-related subsectors such as retail and leisure-related activities continued to recover amid the transition to endemicity and improvement in labour market conditions. The manufacturing sector grew by 9.2 per centy-o-y (1Q22: 6.6 per cent), supported by both the export and domestic-oriented industries. The E&E cluster continued to record a robust double-digit growth amid healthy global demand for semiconductors. In tandem continued improvement in domestic spending activities, the consumer cluster grew at faster pace as well.

All in, RHB Investment maintained its September OPR forecast of a 25-bps hike with the balance of risks of another hike in November, depending on the development of inflationary pressures and global financial conditions.

The implications for Malaysia’s financial markets is that appreciation of ringgit against the US dollar in 3Q22 and 4Q22 will be modest and will mainly be a US dollar weakening story.

“We maintain our end-3Q22 US dollar-ringgit forecast of 4.40, followed by 4.35 at end-4Q22. We continue to advocate adding long duration local currency government bonds in portfolios. Today’s price action in US dollar-ringgit, MGS10YR and the KLCI index doesn’t show much impact from today’s massive upside surprise in 2Q22 GDP. Markets currently are still focused on external events,” it added.