Malaysia Economic Flash – Smaller Than Expected Moderation in 3Q08 GDP On Resilient Domestic Demand

December 10, 2008 at 6:57 am Leave a comment

Announced: Friday, 28 November at 18:00 pm (Malaysia time)
GDP (% YoY) – Actual: 4.7%, Forecast: 3.8%, Consensus: 4.5%, Previous: 6.7%

Bottom line
3Q08 GDP growth slowed, but still outperformed consensus and our expectations. The slowdown was largely due to a plunge in net real exports, although domestic demand also moderated, but less than we had expected. Going forward, key leading indicators, including the official Composite Leading Indicator, the ISM PMI and the OECD Leading Indicator, all point towards a sharper slowdown over at least the next two quarters. In that context, we expect at least another 50bps of rate cuts in 1Q09.

In brief
Third-quarter GDP growth came in at 4.7%, slightly better than market expectations of 4.5%, and a marked slowdown from 6.3% in 2Q08. The slowdown was led by a sharp plunge in net real exports of goods and services, which fell by 14.8%, compared to growth of 20% in the second quarter.

Domestic demand also moderated to 6.5% in 3Q08 versus 8.3% in the previous quarter, due to slowdown across all components. Private expenditure moderated to 8.1% in 3Q08, from 9% in 2Q08, as the drag on purchasing power from the fuel price hikes in June were largely offset by bonus payments to civil servants, festive season spending, and payment of cash rebates for fuel subsidies. Public consumption also slowed to 6.9% from 10.9% in 2Q08.

Gross Fixed Capital Investment (GFCF) slowed substantially to 3.1%, from 5.6% in 2Q08. According to Bank Negara , the slowdown in GFCF reflected cautious business sentiment amidst rising costs and uncertainties in the external environment, although public investment activity was supported by development expenditure, particularly in transportation, agriculture and rural development, and education. This highlights the role of expansionary fiscal spending in shoring up growth.

From a sectoral perspective, the services sector remained the main driver of growth, expanding by a still robust 7.1%, despite moderating from 8.2% in 2Q08, on stronger financial services and consumption activities. Manufacturing slowed sharply to 1.8%, from 5.6% in 2Q08, due mainly to weakness in export-oriented industries, although domestic oriented industries stayed resilient. Agricultural sector growth also halved to 3%, from 6% in 2Q08, due to slower CPO production amidst the onset of a yield down-cycle. Finally, as we expected, construction activity slowed sharply to 1.2%, from 3.9% in 2Q08, due to weaker activity in residential and civil engineering segments. Mining sector output fell 0.3%, following a 0.5% fall in 2Q08, due to lower natural gas output.

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