PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 18 Jun 2021, 10:10 AM


PublicInvest Research Economic Update - A Change of Fortune

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Malaysia’s growth momentum improved in the first quarter thanks to positive spillover impact from massive fiscal stimulus package that was introduced since last year and accommodative interest rate environment with the Overnight Policy Rate (OPR) that was kept at historical low. Improving global macroeconomics conditions triggered a sharp recovery in exports amid a revival in global demand that is a boon for manufacturing and agriculture goods. 1Q21 GDP that declined by a mild 0.5% YoY is a rebound against 4Q20’s -3.4% though trailing the 1Q20’s +0.7%. The quarter’s achievement was also a feat considering pockets of containment measures being implemented throughout the quarter in addition to borders and inter-state travel that were off limits. Output surged on a sequential basis after it ticked 2.7% faster, a rebound against 4Q20’s of -1.5%.

It was an improvement in a few economic sectors led by private investment (1Q21: +1.3%; 1Q20: -1.1%) and manufacturing (1Q21: +6.6%; 1Q20: +1.4%), on top of an impressive net exports form (1Q21: +0.8%; 1Q20: -36.8%). Supply shock condition prevailed in mining and quarrying sector however (1Q21: -5.0%; 1Q20: -2.9%) amid output that was affected by OPEC+ on going supply cut arrangements. Agriculture activity rebounded sharply (1Q21: +0.4%; 1Q20: -8.6%) thanks to a revival in global demand especially from China which emerged resilient from the global COVID-19 pandemic (2020 GDP: +2.3% YoY). Construction activity tanked (1Q21: -10.4%; 1Q20: -7.9%) no thanks to labour shortages and strict Standard Operating Procedures (SOPs) to curb the COVID-19 infectivity. Private sector output slipped on a YoY basis (1Q21: -0.9%; 1Q20: +4.9%) especially private consumption (1Q21: -1.5%; 1Q20: +6.7%) no thanks to various challenges brought by COVID-19.

Output is expected to recover though uneven until the 4Q to be driven by a positive spillover impact from six stimulus packages (PRIHATIN, PRIHATIN+, PENJANA, KITA PRIHATIN, PERMAI, PEMERKASA), accommodative interest rate environment and improving global macroeconomics condition. A rebound in 2021 economic activity (+6.2%) will also be aided by a low base effect following activity that was pummeled by the strong COVID-19 headwinds last year (2020 GDP: -5.6%). This could be tempered by the re-imposition of containment measures though the impact could be manageable thanks to the authorities’ decision to allow uninterrupted operation of almost all economic sectors. The resurgence in COVID-19 new cases is a concern as that could push borders and inter-state travel to remain off limits, potentially delaying the recovery of contact-sensitive industries (i.e., aviation, tourism). A low take-up rate of COVID-19 vaccination programme including vaccine shortages which could affect Malaysia’s aim to reach herd immunity by year-end is also a going concern as that could dampen overall sentiment and therefore, the recovery in output.

Domestic demand remained tepid, with 1Q21 growth declining by a mild 1.0% YoY (1Q20: +3.7%) amid momentum that was weighed by lackluster private consumption activity (1Q21: -1.5%; 1Q20: +6.7%) as output was hurt by uncertain economic outlook, elevated level of unemployment on the back of inflation that surged during the quarter (1Q21: +0.5%) though the impact was largely contained thanks to the government’s decision to put a ceiling price on RON95 petrol and diesel

Public sector activities (1Q21: -1.5%; 1Q20: -1.8%) were less-than encouraging no thanks to the sharp pullback in public investment activity (1Q21: -18.6%; 1Q20: -14.4%) which produced its 13th successive quarter of contraction as spending was capped by tight fiscal condition. Publicconsumption activity improved however (1Q21: +5.9%; 1Q20: +4.9%) amid a front-loading spending to support the economy.

Gross exports surged sharply, reflected by the +11.9% YoY jump in 1Q21 (1Q20: -7.2%), on the back of recovery in trade activities thanks to a revival in global demand especially for agriculture and manufacturing goods. Demand for our goods was also driven by the full economic openings in ASEAN, China and major economies (North America). This could have been higher however if not for the lackluster mining form (mining IPI 1Q21: -4.1% YoY) which remained affected by OPEC+ supply cut intervention (January-March: 7.2m bpd)

Gross imports also recovered (1Q21: +13.0%; 1Q20: -2.7%), led by sizzling capital imports form (1Q21: +42.3%) on the back of a resumption in capital spending following its hiatus last year due to uncertainty brought by the global COVID-19 pandemic. Net trade performance was solid following a sharp jump of +0.8% YoY in 1Q21 (1Q20: -36.8%). Contribution from manufacturing segment (1Q21: +6.6%; 1Q20: +1.4%), our key engine of growth, surged to multi-year highs thanks among others to a global pandemic condition, a normalization in supply chain and trade networks, full economic openings in ASEAN, China and North America on top of rapid global cellular network migration towards the 5G. Services sector was a drag however no thanks to the delayed recovery in sub-sectors such as F&B, retail and accommodation amid various forms of containment measures (MCO, CMCO) and strict Standard Operating Procedures (SOPs) that hurt the sector. This was further added by borders that remained closed and inter-state travel that were off limits except for work and emergency purposes.

On a QoQ and seasonally adjusted basis, Malaysia’s 1Q21 GDP that ticked 2.7% faster (1Q20: -1.5%) is in line with encouraging MIER composite survey. Consumer Sentiment Index (CSI) that jumped by 13.7 points in 1Q21 to settle at a 10-month high and just below the neutral level of 98.9 is a feat considering that the index slipped to historical low just a year ago (1Q20: 51.1).

Business sentiment index (BSI), on the other hand, was resilient after it settled above the neutral level for two successive quarters though it dropped slightly by 3.6 points to 111.80 in 1Q21. This is also an impressive achievement given that the index dropped markedly as well last year (1Q20: 83.0).


It was an almost broad-based expansion on the supply side led by key sector such as manufacturing which netted a higher 1Q21 YoY growth of +6.6% (1Q20: +1.4%) amid production and consumption activities that were boosted by various drivers including full economic openings in ASEAN, China and major economies (North America), a normalization in supply chain & trade network and a global pandemic condition that pushed demand for computer and virtual communication equipment. This was further boosted by the rapid global transition towards big data technology – a leap towards the 5G network, which underpinned demand for handphone and tablets. This was further pushed by massive global fiscal spending, resulting in generous financial transfer that pushed disposable income higher and therefore, demand for manufacturing products.

It was a less-than encouraging form for the services sector (1Q21: -2.3%; 1Q20: +3.1%) however no thanks to several factors that dragged its performance including various forms of containment measures (MCO, CMCO), strict SOPs for contact-sensitive industries on top of borders that remained closed and inter-state travel that were off limit. Support for the sector came however from key sub-sectors like finance (1Q21: +11.3%; 1Q20: +4.2%), information and communication (1Q21: +6.3%; 1Q20: +6.7%) and motor vehicle (1Q21: +6.4%; 1Q20: -2.9%) that offset the sharp drop in consumer related sub-sectors like F&B (1Q21: -23.2%; 1Q20: +3.1%) and accommodation (1Q21: -59.1%; 1Q20: -4.2%).

Manufacturing export-related sub-sector such as electronic components & boards and others was the primary growth determinant after recording a YoY growth of +12.4% (1Q20: +3.7%). Performance by electrical equipment (1Q21: +8.3%; 1Q20: +0.4%) along with motor vehicles (1Q21: +9.4%; 1Q20: -2.0%) was equally commendable. This partially offset a sustained slowdown in mining and quarrying (1Q21: -5.0%; 1Q20: -2.9%) amid activity that was hit by supply cut arrangements by OPEC+.

Construction sector activity dropped further in 1Q21 (-10.4%; 1Q20: -7.9%) no thanks to the sharp pullback in civil engineering (1Q21: -28.8%; 1Q20: - 5.1%) and non-residential buildings (1Q21: -5.9%; 1Q20: -11.6%) activities as the sector was hit by COVID-19 outbreak and strict SOPs due to COVID-19 pandemic.

Agriculture sector’s growth (1Q21: +0.4%; 1Q20: -8.6%) was lifted by a recovery in oil palm (1Q21: -3.5%; 1Q20: -22.2%) and rubber yields (1Q21: - 12.0%; 1Q20: -18.3%) thanks to output that surged following a revival in global demand, full economic openings in major trading partner (China) and a normalisation in supply chain and trade network.


Domestic demand was lackluster in 1Q21 (-1.0%; 1Q20: +3.7%) after it was affected by various COVID-19 challenges. Output was supported by the turnaround in private investment activity however (1Q21: +1.3%; 1Q20: - 1.1%) as sentiment was lifted by COVID-19 vaccine breakthrough, generous fiscal stimulus measures and accommodative interest rate environment. Private consumption remained weak however (1Q21: -1.5; 1Q20: +6.7%) as sentiment was pummeled by various COVID-19 restrictions and containment measures on top of elevated level of unemployment which pushed consumers to be cautious in spending.

This was further added by a sharper contraction in public investment (1Q21: -18.6%; 1Q20: -14.4%) amid activity that was weighed by challenging fiscal condition. Public consumption netted a steady 1Q21 YoY growth of +5.9% (1Q20: +4.9%) driven by fiscal measures to front load the economy to offset against the COVID-19 headwinds. Favourable trade mix and capital market conditions pushed our current account-to-GNI to widen to 3.6% in 1Q21 (1Q20: +2.6%). A respectable 1Q21 current account-to-GNI performance was lifted by bigger surplus in the goods sub-account and a sharp turnaround in the financial account.


BNM is expected to keep the policy rate steady for the most part of 2021 thanks to massive fiscal stimulus programme that will be rolled out fully this year. As the lag impact from fiscal stimulus package may take a few quarters to produce tangible results, the central bank may opt for policy paucity given that there are about six packages worth more than RM340bn (>20% of GDP) that will be implemented in this fiscal year (PRIHATIN, PRIHATIN+, PENJANA, KITA PRIHATIN, PERMAI, PEMERKASA). In addition, the encouraging rebound of high frequency indicators (i.e., MIER Sentiment Index, IPI, trade, Manufacturing PMI, Malaysian Economic Indicators: Leading Index) may push the central bank to continue with a wait-and-see strategy before making the next policy move.

The wait-and-see strategy in the meantime will be also be driven by the rapid COVID-19 vaccination programme that is expected to reach a comfortable level of coverage by year end (note: herd immunity) that could induce further turnaround in consumers and business sentiment and by extension, the economic activity. Policy paucity strategy is also driven by inflation that will be pushed more by the global cost factor (oil) and less of a demand-driven factors. All these point to the OPR to remain steady in the immediate term before a prospective adjustment by 25 basis points in the fourth quarter


CPI is projected to produce a convincing turnaround in 2021 to be driven especially by the advancement in oil prices (2021F: USD45-50 per barrel; 2020: USD43 per barrel). Oil price is forecast to recover further this year thanks, among others, to the positive impact from OPEC+ supply cut arrangements which may last throughout the year. The rapid global COVID- 19 vaccination drive will also shore-up confidence that will fuel the rally in oil prices. CPI will also benefit from the full impact of six fiscal stimulus packages worth RM340bn, more than 20% of GDP, that will be carried out fully this year. The creation of 500k new employment by the private-public initiatives will also bode well for the CPI. The low interest rate environment that is expected to continue in the near future will also support demand and therefore, the headline index. All these will be supportive of CPI which is expected to rebound by 2.4% YoY (2020: 1.2%)/.


Ringgit is likely to recover in 2021 to be driven especially by the advancement in oil price thanks to OPEC+’s continuous intervention since last year which is starting to produce tangible results. The improving global macroeconomics condition and massive global fiscal stimulus spending will also underpin oil price trajectory. The rapid global COVID-19 vaccination drive especially in major economies will be another driver for oil price and therefore, the Ringgit. The full economic openings in ASEAN, China and major economies (North America) will in turn lift the exports activity and therefore, the demand for Ringgit. There are still downside risks for the Ringgit however no thanks to the impending start of US-China 2nd trade talks. The slow take-up rate of COVID-19 vaccination drive including vaccine shortages could also hurt sentiment towards the Ringgit as that could delay our full economic recovery.


2021 is expected to be a better year for Malaysia and ASEAN thanks to concerted efforts to boost output through generous fiscal stimulus packages which have been rolled out continuously since last year. The low interest rate environment which has been maintained since the previous year is another lever of growth for the economy. The strong turnaround in exports thanks to the revival in global demand, global pandemic condition, normalization in supply chain & trade network and rapid cellular network migration towards 5G is another growth stimulant for the year. Growth will also gain from a low base effect following output that was severely hit for the most part of last year due to the spark of global pandemic, the COVID-19.

An effective handling of COVID-19 pandemic by ASEAN government by now will also bode well for sentiment and therefore, the growth momentum which could push Malaysia’s GDP to rebound by 6.2% YoY, a sharp turnaround compared to 2020’s of -5.6%. There are downside risks to growth however no thanks to the delay in the recovery of contact-sensitive industries due to the resurgence in COVID-19 infections which could push the borders to remain closed and inter-state travel to be off limit. The shortages of COVID-19 vaccine are another concern as that could push back the target to reach general immunity for the population. Growth could also be dragged by the poor execution of COVID-19 vaccination drive, a low take up-rate including a discovery of a more lethal COVID-19 variants which could accelerate the infectivity rate further. OPEC+ could in turn dial-back on their plan to increase output especially if oil prices remain lethargic where this may hurt major oil producers in the region especially Malaysia, Indonesia and Thailand. The impending start of US-China 2nd trade talk is another concern as that could dampen exports which were just about to recover though the probability is low for now thanks to the US that is still occupied with COVID-19 headwinds.

Source: PublicInvest Research - 12 May 2021

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