The 3Q21 GDP showed a larger contraction of -4.5% y/y, a stark drop from 16.1% in 2Q2021, worse than our in-house forecast -1.9%. The sharp decline was due to the severe effects of the reimposition of MCO3.0 in 3Q and higher GDP base. The GDP average for the first three quarters of the 2021 stands at 3.7%.

Diving into the figure deeper, the poor economic performance was dragged by the overall decline of all major economic sectors. Looking at the demand side, excluding the government final consumption expenditure, all expenditure components logged a contraction as well.

Moving forward, the local economy will be reignited by the strong external trade especially through the semiconductor and petroleum products upswing, elevated commodity prices, and better pandemic and vaccine management which lead to easing of pandemic restrictions. On that note, we have revised our full year 2021 GDP projection to 3.5% y/y assuming the 4Q21 GDP will grow by 3.4%.

A. Highlights

• The 3Q21 GDP showed a larger contraction of -4.5% y/y, a stark drop from 16.1% during the second quarter of 2021, and much worse than our in-house forecast of -1.9% and Bloomberg’s forecast of -2.1%. Therefore, The GDP average for the first three quarters of the 2021 is currently standing at 3.7%.

• The sharp decline was due to the severe effects of the reimposition of MCO3.0 during the quarter and higher GDP base figure (3Q20: RM351.6bil vs. 3Q21: RM335.8bil).

• Looking deeper, what has been dragging the quarter’s GDP is the decline of all sectors in terms of sectorial performance. Services dropped 4.9% y/y (2Q21: +13.5%), manufacturing edged lower by 0.8% y/y (2Q21: +26.6% y/y), agriculture sector declined by 1.9% y/y (2Q21: -1.5%), mining & quarrying decreased by 3.6% y/y (2Q21: +13.9%) and construction sector contracted 20.6% (2Q21: +40.3%).

• On the other side of the equation, expenditure’s components also recorded declining trend except for the government final consumption. Domestic consumption was constrained. The private final consumption fell 4.2% (2Q21: +11.7%), gross fixed capital formation (GFCF) decreased by 10.8%, and net exports tumbled 37.5% (2Q21: +34.3%). Meanwhile, government expenditure increased 8.1% y/y, which is lower than 9.0% during the second quarter of 2021.

• Interestingly, manufacturing of petroleum, chemical, rubber & plastic products and electrical and electronic (E&E) products remained in the growth zone with 12.6% y/y and 7.1% y/y, respectively.

B. Key Takeaways

• For the final quarter of 2021, we can expect the situation should be improving supported from the reopening of the economy. With as much as 95.2% of adult population have been fully vaccinated (as of 13th Nov) and most states are already in Phase 4 of the National Recovery Program (NRP), we are on track towards economic recovery. Most affected industries such as tourism and construction will start to rebound from its deep-trough business cycle.

• Moving forward, the local economy will be reignited by the strong external trade especially through the semiconductor upswing. The digitalization prospect seemed to remain strong, Also, elevated commodity prices will help support the economic growth as well. Better pandemic and vaccine management which lead to herd immunity and eventually, easing of pandemic restrictions will be the main core driver of local economic growth.

• Meanwhile, we remain cautious on the possibilities of the emergence of new variant, which could cause another round of lockdown. Furthermore, with recent signs of surging inflation, this will hurt spending as underlying inflation is on the uptrend.

• On that note, we have revised our full year 2021 GDP projection to 3.5% y/y assuming the 4Q21 GDP will expand by 3.4%.

Source: AmInvest Research - 15 Nov 2021