As announced last Friday, Malaysia’s 1Q real GDP grew 5.6% y-o-y as investment in the private sector picked up. However, it was a tad lower than last quarter’s 5.7%, partly due to weaker exports at the start of the year. 
 
Macquarie Equities Research (MER)’s view on the GDP announcement is as follow:

Real GDP growth and current account surplus beat consensus in 1Q 2015. Malaysia's real GDP expanded 5.6% YoY in 1Q 2015, slightly below MER’s estimate of 5.9% but marginally ahead of Bloomberg consensus of 5.5% YoY -- decelerating marginally from 5.7% YoY growth in 4Q 2014. Malaysia's growth pace remains second only to the Philippines in ASEAN. The robust economy persuaded Bank Negara Malaysia (BNM) to refrain from cutting the policy rate last week, despite a March 2015 inflation print of just 0.9% YoY (implying a real policy rate of 2.35%). The current account surplus widened to MYR10bn in 1Q 2015, in line with MER’s estimate but much larger than the consensus estimate of MYR6.1bn.
 
Fastest-growing industrial sector in Asia during 1Q 2015! The big story of 1Q 2015 was the resurgence of Malaysian industry -- with Malaysia's 6.4% YoY growth in industrial output the fastest among Asia's 10 largest economies during the quarter (outpacing China for the first time in at least a decade). Manufacturing expanded 5.6% YoY (vs 5.4% in 4Q 14), while Mining accelerated to 9.6% YoY growth and Construction to 9.7% YoY (from 9.5% and 8.8% YoY respectively in the previous quarter). Services sector growth moderated slightly to 6.4% YoY (from 6.6%), while Agriculture contracted 4.7% YoY amid the continued slump in crude palm-oil (CPO) output.
 
GST to weaken growth in the rest of 2015, but we continue to expect 6.1% YoY RGDP growth in 2016. MER retains its forecast of 4.7% YoY real GDP growth for 2015 (slightly below consensus of 4.9% YoY). MER continue to expect private consumption to decelerate sharply in the current quarter (following the introduction of the GST six weeks ago), and to remain subdued on account of the GST for the rest of 2015. However, MER continue to expect a rebound to 6.1% YoY real GDP growth in 2016 (above consensus of 5.3%), as export-oriented manufacturing strengthens further and domestic demand normalizes in Year 2 of the GST era.
 
GST to boost current account surplus; MER continues to expect an OPR cut within the next 3 months. Malaysia's current account surplus has moderated in the past 5 years (to 4.7% of GDP last year from 12-15% of GDP in 2005-09) primarily because fixed investment spending grew at an average annual pace of 10.1% YoY during those five years.

Fixed investment spending expanded a robust 7.9% YoY in 1Q 2015 -- causing the current account surplus to moderate to MYR9.97bn (from MYR19.52bn in 1Q 2014). However, the surplus remains much wider than consensus expected, and MER expects it to widen sharply further as the GST (a tax on consumption) helps to curtail consumption (and thus bolster the savings rate). With the current account surplus widening, and inflation likely to remain tame (2.2% YoY in April by MER’s estimate despite the GST), MER expects BNM to cut the OPR within the next 3 months. But with the rate cut delayed relative to MER’s previous estimate, it expects the ringgit to be less weak than in its previous forecast -- bottoming at MYR3.85/US$ in September (rather than MYR3.95/US$).

Source: Macquarie Research - 18 May 2015