Malaysia shocks peers with 5.2% economic growth

Thanks to rocketing domestic demand and investment spending.

According to OSK-DMG, the Malaysian economy continued to outperform expectations, rising 5.2% yoy in 3Q vs. market and our expectations of 4.8% and 5.0% respectively.

Here's more from OSK-DMG:

This though is still a tad slower than 2Q12’s upwardly revised 5.6% expansion. Robust domestic demand, which rose 11.4% yoy in 3Q, slower than 2Q’s 14.0%, remained the key driver of growth in 3Q.

On the expenditure side, driving domestic demand higher was investment expenditure, which continued to rise by double-digits for the third straight quarter, rising 22.7% yoy in 3Q vs. 26.1% in 2Q.

Private consumption remained resilient, expanding by 8.5% yoy in 3Q compared to 8.8% in 2Q, supported by a tight labor market and strong income growth. The external situation worsened for Malaysia in 3Q with exports dropping 3.0% after gains of 2.1% in 2Q, dragging growth lower in the quarter.

On the supply-side, with the exception of mining and quarrying (which fell 1.2% yoy), the rest of the sectors saw growth in the quarter. Not surprisingly, the services sector was the start performer, expanding by 7.0% yoy in 3Q on the back of resilient domestic demand. However, manufacturing rose by just 3.3% yoy in 3Q from 5.6% in 2Q on the back of weak external demand.

Unlike Singapore, where growth greatly underperformed all expectations because of weak external conditions, external headwinds has not had the same impact in Malaysia.

Resilient domestic demand, aided by continuing fiscal stimulus and accommodative monetary policy, has helped offset any drag from the external sector and provides support to growth.

With the government continuing to move forward with ambitious economic transformation program, we can expect economic growth to remain robust in the quarters ahead.

Given that the global environment remains fragile, we do not expect any growth to be outperformed 3Q and instead now expect 4Q growth to moderate slightly to 5.0% instead of our previous call of 5.5%.

Nevertheless, this does not change our long-held call that the economy would grow by 5.2% in 2012. We also maintain our 2013 real GDP projection of 4.9% for the moment given the lack of clarity in the global environment.

As for policy, we reiterate our expectations that BNM to keep the key policy rate accommodative to support growth going into 1H13 given that the election yet to be called.

However, as inflationary pressures start to build in 2013, we expect the central bank to move to hike rates by a total of 50 bps in 2H13 to anchor inflationary expectations.