Malaysia’s economic strength 3Q16 came in as a surprise to many, particularly given the macro volatility that has troubled the country’s trade throughout the year.
KUCHING: Malaysia’s economic strength in the third quarter of 2016 (3Q16) came in as a surprise to many, particularly given the macro volatility that has troubled the country’s trade throughout the year.
Last week, Bank Negara Malaysia (BNM) announced that Malaysia’s economy expanded 4.3 per cent in 3Q driven mainly by domestic consumption and net exports.
The economy grew four per cent between May and June this year while headline inflation moderated to 1.3 per cent in the third quarter.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) said, “The strength of Malaysia’s economy in 3Q16 is a surprise to many, particularly as our exports activity has not been doing so well recently.
“Gross domestic product (GDP) grew by 4.3 per cent year-on-year (y-o-y), against economists’ expectations at 4.1 per cent.”
It noted that the details, the strong numbers mostly came from the low base effect and a better exports performance relative to imports during the quarter.
“We believe the one that has been dropping are imports of services, as imports only contracted by a marginal 0.1 per cent y-o-y for 3Q16, as compared to exports of which dropped by 2.3 per cent y-o-y,” the research team remarked.
It pointed out that solid double-digit growth from insurance industry and finance pushes services sector expansion to a six-quarter high at 6.1 per cent.
“Y-o-y, the insurance industry grew by 14.9 per cent during the quarter – the fastest pace in almost four years. This adds 0.2 per cent point growth to the overall GDP. Remarkably better claims ratio of the insurances companies improved their bottom line during the quarter and this happened due to a positive structural change which is enhancement in claims management system on Malaysian Motor Insurance Pool (MMIP).
“On the flipside, we see less catalyst in the near future for the industry hence expects growth to normalise,” it said.
The research team also pointed out that the finance industry experienced positive rebound, increasing by two per cent y-o-y after contracting marginally by 0.2 per cent y-o-y in 2Q16.
It added, banks might be seeing lesser provision and better operating expenditure (opex) in the quarter after undertaking huge provisions earlier this year which overall improved their earnings.
As for private consumption growth, MIDF Research noted that while growth of the sector was high at 6.4 per cent y-o-y, it was mainly due to low base effect.
“On seasonally adjusted basis, private consumption only grew by a marginal 0.2 per cent quarter-on-quarter (q-o-q), its weakest momentum since 4Q16. Despite the salary increment of government officials in July, the higher unemployment rate for the quarter at 3.5 per cent gave an adverse impact to private consumption,” it pointed out.
The research team also said that Malaysia’s investment activity remained moderate as gross fixed capital formation grew only two per cent y-o-y in 3Q, as compared to a strong 6.1 per cent y-o-y in the previous quarter.
“Much of the decline was caused by public investment, which declined by 3.8 per cent y-o-y (7.5 per cent y-o-y in 2Q16) while private investment remained relatively strong at 4.7 per cent y-o-y (5.6 per cent y-o-y in 2Q16).
“However, the moderating investment activity is becoming a global phenomenon, with little or no sign of recovery due to the global economic condition,” the research team highlighted.
As for Malaysia’s trade, MIDF Research noted that trade balance improved, contributing 0.5 percentage points. It added, most of the weakness in imports of services came from travelling, which declined by 4.2 per cent y-o-y and transportation by 5.3 per cent y-o-y.
Aside from that, the research team said, agriculture was the still the biggest drag to the headline GDP figure, shedding 0.6 per cent of GDP growth while the manufacturing industry received supports fromb the food industries, which caused its growth to improve marginally to 4.2 per cent.
Overall, MIDF Research said it does not expect more rate cuts in November due to this quarter’s unexpectedly strong y-o-y performance.
“The strong GDP growth on year-on-year basis at 4.3 per cent, which is in line with BNM expectation, should hold off BNM from conducting any further rate cut for the year.
“As such, we are revising our OPR expectation from 2.75 per cent to three per cent by year-end 2016, while remaining one rate cut next year which will lead the benchmark interest rate to end year 2017 at 2.75 per cent,” it said.
The research team also revised its GDP growth forecast for 2016 to 4.1 per cent, from four per cent while 4Q16 GDP has been projected to grow to four per cent.
At the same time, the research team expected Malaysia’s economy to grow by 4.3 per cent in 2017.
Nevertheless, MIDF Research cautioned, “At the moment, there are signs of a better global trade activity next year, though we remain cautious with any possible protectionism policy set up by the newly president-elect Donald Trump as he has been promising during his manifesto.”