• GDP increased double-digit to 16.1% in 2Q21

• Domestic demand rebounded by double-digit growth in 2Q21

• All sectors recorded positive growth except the agricultural sector

• Higher current account balance in 2Q21

• FDI posted a lower net inflow of RM8.2bn

• Prolong lockdown impedes 2021 economic recovery

Malaysian economy recorded a strong double-digit growth rebound in 2Q21 by 16.1% compared with the -0.5% contraction in 1Q21. The performance ended the four consecutive quarters of contraction mainly attributed to robust external demand. The low base effect also led to substantial growth in domestic demand, provided overall support to the growth. The economic performance in the pandemic era was also measured on a monthly basis where GDP in April surged by 40.1%, May moderated to 19.8%, while June slipped to a negative 4.4%. On a quarter-on-quarter seasonally adjusted, GDP slipped into double-dipped contraction by 2.0% (1Q21: +2.7%). For the first half of 2021, Malaysia’s economy grew 7.1% as compared to negative 8.4% in 1H 2020.

The GDP had rebounded in 2Q21 due to the low base factor and recovery in both domestic and external demand. Domestic demand rebounded after four straights quarter of contraction as all components posted positive growth. On the supply side, the manufacturing sectors advanced further and posted higher growth than a quarter ago. Meanwhile, other sectors rebounded except the agricultural sector.

Domestic demand rebounded by double-digit growth in 2Q21

Growth in domestic demand rebounded by 12.3% yoy in 2Q21, reversing the contraction of -1.0% in 1Q21, lifted largely by low base effect and driven by the recovery in all subcomponents mainly the private sector. The performance was the first growth in five quarters since the COVID-19 pandemic outbreak hit the country and led the economy to recession. Economic activity picked up at the start of the second quarter but slowed following the reimposition of stricter nationwide containment measures, particularly under Phase 1 of the Full Movement Control Order (FMCO)

Private consumption jumped by 11.6% (1Q21: -1.5%) due to low base comparison as consumer spending plummeted in the second quarter of 2020 amid the restrictions on mobility from lockdown. The performance during the quarter was better than 2Q20 but when compared to 1Q21 the private consumption had declined (2Q21: -11.5%). Private consumption improved year-on-year as the restriction was eased in the earlier part of the quarter, improving consumer mobility and the job market. The retail spending improved by 19.8% (1Q21: +1.6%) while e-commerce in 2Q21 grew by 30.0% (1Q21: +23.3%). The labour market weakened as June’s unemployment rates posted 4.8% (May: 4.5%; Apr: 4.6%), while the jobless rate for 1Q21 remained unchanged at 4.8% (1Q21: 4.8%). Public consumption registered a higher growth of 9.0% (1Q21: +5.9%), propelled by stimulus packages in response to the COVID-19 pandemic and higher spending on supplies and services.

The investment on a fixed asset or known as Gross Fixed Capital Formation (GFCF), registered a positive growth of 16.5% in 2Q21 (1Q21: -3.3%). The performance was due to strong growth in structure by 20.2% (1Q21: -10.4%) and machinery & equipment by 15.1% (1Q21: +10.3%). The other asset also rose by 4.4%, rebounded after five quarters of contraction. The overall improvement in GFCF was due to the sustained increase in private sector investment coupled with the low base effect. Private investment recorded a positive growth of 17.4%, up from a 1.3% gain in 1Q21, mainly supported by continued capital spending in existing and new projects, particularly in manufacturing activity. Furthermore, growth was also underpinned by capital spending in export-oriented sectors, supported by robust global demand. The improvement in private investment is also seen as a catalyst for higher future output. Public investment registered a growth of 12.0% (1Q21: --18.6%). This mainly reflects the low base effect which slower capital spending by the general government posted in the second quarter last year. In addition, investment activity improved mainly in the private sector as spill-over from export-oriented industry drives capital expansion.

In 2Q21, real exports increased higher by double-digit growth of 37.4% (1Q21: +11.9%) supported by firm exports manufactured goods to Malaysia’s trading partners. Imports rose to 37.6% (1Q21: +13.0%) due to higher capital, import consumption and intermediary imports goods. Subsequently, net exports remained positive by registering 34.3% (1Q21: 0.8%) and continued contributing positively to GDP.

All sectors recorded positive growth except the agricultural sector

On the supply side, positive growth was recorded in manufacturing, services, mining and construction in 2Q21. The growth was supported by a low base from the significant decline in the second quarter last year. Meanwhile, the agricultural sector recorded a contraction compared to positive growth in the last quarter.

The manufacturing sector grew strongly by 26.6% (1Q21: +6.6%), supported by a broadbased growth momentum across all the major manufacturing clusters. The robust growth in the electrical and electronics (E&E) cluster was underpinned by the technology upcycle, mainly in semiconductors demand. The consumer cluster in the manufacturing sector mostly returned to positive growth with the renewed consumer spending and strong export goods as compared to a year ago. Meanwhile, the strong growth was also driven by rubber product output, which recorded six quarters of double-digit growth amidst a prolonged COVID-19 pandemic. However, on a quarterly basis, the sector shrank for the second quarter by 0.1% (1Q21: -2.9%) due to prolonged stringent movement restrictions nationwide.

The services sector’s activity expanded by 13.4% (1Q21: -2.3%) in 2Q21. The sector improvement followed the restriction relaxation in April and May. However, the reimposition of lockdown in June had severely impacted consumer mobility, led to a downfall in consumer spending. Meanwhile, the information and communication subsector continued to benefit from rising demand for e-commerce and e-payment activity and work from home (WFH) and learning arrangements. Likewise, strong growth was recorded in the finance and insurance subsector, which was attributed to higher fee income, sustained loan and deposit growth, and higher net insurance premiums with fewer claims.

Activity in the construction sector rose by 40.3% (1Q21: -10.4%). This was reflected by a huge improvement in civil engineering activities (2Q21: +50.0%; 1Q21: -28.8%) and residential buildings (2Q21: +16.3%; 1Q21: -4.7%), reversing the sector contraction during the quarter. Furthermore, other sub-sectors expansion pushed the overall sector performance upward. The construction sector growth improved due to higher work value registered as ongoing small-scale projects and continuation works in large infrastructure projects. The agriculture sector contracted by 1.5% (1Q21: +0.2%), mainly due to a large decline in oil palm output as harvesting activity was affected by continued labour shortages. However, growth in rubber, fisheries, livestock and other agriculture sub-sectors cushioned the overall sector performance during the quarter.

Meanwhile, the mining & quarrying sector rebounded by 13.9% from negative 5.0% in the previous quarter. This performance was mainly attributed to higher natural gas production as global demand pick up and the price of natural gas tracking the high global oil price as a benchmark.

Higher current account balance in 2Q21

Malaysia’s current account balance (CAB) recorded a surplus of RM14.4bn or 3.9% of GDP during the quarter (1Q21: RM12.3bn or 3.3% of GDP) supported by net exports of goods and a smaller deficit in secondary income. For the first six months of 2021, the CAB recorded RM26.7bn against RM16.5bn in the same period last year.

The goods surplus increased to RM40.7bn (1Q21: RM36.6bn) as export increased faster than imports. During the quarter, gross exports goods grew by 47.8% (1Q21: +18.4%), driven by E&E, rubber and chemicals-based products. Exports of goods contributed 92.0% to Malaysia’s exports, recorded RM244.0bn from RM225.5bn in the previous quarter. Gross imports goods, registered rose by 46.0% (1Q21: +16.9%) due primarily to the robust import of capital, consumption and intermediate imports. Imports of goods surged by 7.7% qoq to record RM203.4bn. Overall, the trade surplus goods and servicesinched higher to RM25.2bn (1Q21: RM21.7bn) in 2Q21.

In the services account, the deficit widened to RM15.4bn (1Q21: -RM15.0bn) due mainly to higher payment for transportation and travel services. The travel account continued to be in deficit (2Q21: -RM3.7bn; 1Q21: -RM3.4bn) as international travel restrictions remained. Meanwhile, exports of services increased to RM21.1bn (1Q21: RM20.3bn), while imports of services rose to RM36.5bn (1Q21: RM35.2bn) respectively.

The primary income account recorded a higher deficit of RM9.5bn (1Q21: -RM5.7bn) in 2Q21. This was driven by the higher income earning by foreign companies in Malaysia of RM28.7bn (1Q21: RM23.0bn), up by 24.7% from the preceding quarter

The secondary income account posted a lower deficit of RM1.4bn (1Q21: -RM3.6bn). The deficit was due to significant receipts recorded during the quarter, RM5.8bn compared to RM4.0bn in 1Q21, while lower payments to abroad recorded at RM7.2bn (1Q21: RM7.6bn) in this quarter precisely on the workers’ remittances and other transfers.

FDI posted a lower net inflow of RM8.2bn

Foreign Direct Investment (FDI) decreased to net inflows of RM8.2bn, largely into equity and investment fund shares. The FDI inflow was channelled mainly into manufacturing, financial and wholesale & retail trade sectors, particularly from Singapore, Hong Kong, and Japan. Total inflow in Malaysia was primarily channelled to the manufacturing sector, which accounted for 39.6% or RM289.3bn. This was followed by financial & insurance/takaful activities at 23.9% (RM174.3bn) and wholesale & retail at 6.1% (RM44.5bn).

Higher external debt, but remained manageable

Malaysia’s external debt amounted to RM1,020.7bn, or 68.5% of GDP as at end-June 2020 (end-March 2021: RM1,039.7bn or 73.2% of GDP). The decline was due mainly to a net repayment of interbank borrowings, withdrawal of NR deposits as well as exchange rate valuation effect following stronger ringgit against selected major and regional foreign currencies in second quarter 2021. This was partly offset by a net issuance of bond and note abroad and an increase in NR holdings of government domestic debt securities.

The country’s external debt remained manageable, given its favourable currency and maturity profiles. Ringgit denominated external debt amounted to RM358.2bn and accounted for 35.1% of total external debt (end-March 2021: 33.6%). It was largely in the form of NR holdings of domestic debt securities (68.4% share of ringgit-denominated external debt) and ringgit deposits (16.8% share) in resident banking institutions. These liabilities were not affected by fluctuations in the ringgit exchange rate.

Foreign currency (FCY) external debt accounted for the remaining RM662.5bn or 64.9% of total external debt. 52.7% of FCY-denominated external debt were by the corporate sector and are mainly subject to prudential and hedging requirements. 29.5% of total FCY denominated external debts were long-term bonds and notes issued offshore, mainly by non-financial corporates. Intercompany loans, which accounted for 14.3% of FCYdenominated external debt, were generally on flexible and concessionary terms.

Prolong lockdown impedes 2021 economic recovery

Malaysia’s GDP increased double-digit in 2Q21, registering +16.1% compared to a decline of 0.5% in 1Q21, attributable to low base effect when the pandemic onset last year severely affected the economy in 2Q20. On a seasonally adjusted quarterly basis, the economy recorded a contraction of 2.0% qoq compared to +2.7% qoq in the preceding quarter. Based on a six-month perspective, GDP rose by 7.1%, relative to a contraction of 8.4% during the same period in 2020 and indicates a continued recovery trajectory.

Based on the monthly GDP performance, growth in April and May 2021 recovered strongly at 40.1% and 19.8%, respectively, due to the low base effect during the same months in 2020. Growth was also supported by the implementation of stimulus and assistance packages throughout the period, and complemented by ongoing measures under Budget 2021. However, GDP growth in June declined by 4.4% (Jun’20: -3.2%), the first decline in four-month and the lowest since October 2020 of -4.7%, due to the impact of MCO 3.0 beginning mid-May, as well as Phase 1 of the National Recovery Plan (NRP) in early June. To highlight, the fall in GDP in June 2021 was not as severe as the experience during the MCO 1.0 in April-May 2020 (Apr’20: -28.6%; May’20: -19.5%).

Basically, Malaysia’s economy fell back into contraction last quarter as the country’s worst COVID-19 outbreak to date set back the recovery. The near-term outlook remains bleak, with another sequential contraction likely in 3Q. The virus wave has yet to peak and political turmoil adds to headwinds for investors. Although growth is expected to continue from 3Q21 onwards, the pandemic resurgence appears to remain a big problem even as we step into the second half of 3Q. The country continues to break record-highs in terms of the incremental daily cases, fuelled by the delta variant.

Hence, we try to surmise the impact of the latest total lockdown on 3Q21 growth. Indeed, for 2Q21, the base effect helped to record a double-digit growth, while the impact was lesser than the first lockdown in 2Q20 last year. With 3Q20’s low base effect expected to be felt, where economic activity contracted by -2.7% yoy in July 2020, followed by -3.6% in August and -1.6% in September, we expect real GDP growth to sustain positive growth in 3Q21, but at a much slower pace.

We revised downward our 2021 GDP growth forecast to 3.8% yoy from 5.1% yoy, on account of multiple unfavourable incidences that push our calculations lower. Our expectation earlier was based on the growth trajectory in 2021 supported by low base effect and strong external demand and gradual recovery in domestic demand. However, with the reintroduction of MCO 3.0, FMCO, EMCO and NRP, we are now looking at much lower growth by reducing 1.3 percentage points from the earlier estimation. The low base factor and external demand are still intact as the major growth trajectory aligns with our expectations. However, we foresee the domestic demand to slow down in the upcoming quarter. We anticipate consumption activities to weaken due to the tighter restrictions imposed nationwide and the shutdown of sectors deemed as non-essential, as the lockdown had been extended to beyond June and going into 3Q21.

The outlook for 3Q21 is expected to be quite challenging, given the imposition of the enhanced MCO for two weeks in most parts of the Klang Valley in July as well as the prolonged Phase 1 of the NRP in several states which are significant contributors to the nation’s gross domestic product. Nevertheless, the impact would be cushioned by the ease of restrictions for fully vaccinated people as well as for states which have successfully transitioned to Phases 2 and 3. The outlook for the 4Q21 is expected to improve, underscored by a gradual recovery from the reopening of more economic and social sectors as more people are vaccinated

Nevertheless, we expect the growing external demand will contribute positive to Malaysia’s economy in the latter part of the year. The other factors that would drive Malaysia’s economic recovery include recovery in commodity prices as well as the implementation of infrastructure projects with high multiplier impact. These factors will support Malaysia’s economic fundamentals, which remain resilient even during these difficult times, underpinned by the increasing sophistication, depth and diversity of the Malaysian economy where services and manufacturing sectors account for more than 80% of the economy. The manufacturing sector and exports are expected to benefit from the current thriving global demand for E&E products, hydrocarbons such as crude oil and natural gas as well as personal protective equipment.

On the global scenery, the acceleration of inoculation in key trading partners is a positive accelerator to Malaysia’s external trade. Therefore, pent-up global demand anticipates continued to lift Malaysia’s export demand, mainly in E&E output, healthcare products, resource and commodities-based products.

Meanwhile, the domestic vaccination program is expected to reach herd immunity earlier as 50.7% of the population have been vaccinated with one dose while the numbers of second dose jab are constantly above 200k daily. This positive development should help lift sentiment and aid recovery in domestic demand moving forward. We are optimistic that the encouraging progress in the national vaccination programme will help to relieve pressure on the national healthcare and increases the likelihood to achieve the herd immunity by the fourth quarter of this year. Bank Negara Malaysia (BNM) believes the impact of lockdown has been cushioned by greater adaptability to restrictions and ongoing policy supports. BNM also sees the economic trajectory will depend on the path of the vaccination program. Achieving herd immunity will shift all the states into phase 3 by October, which will support the reopening of the economy.

Overall, Malaysia's growth recovery is expected to broadly resume in the later part of 2H21 and improve going into 2022. The expected reopening of the economy would support a gradual recovery in 4Q21, with higher global growth and sustained policy support providing a further lift to economic growth. The Malaysian economy recovery in 2021 will be supported by a better external and gradual recovery in domestic demand. While the imposition of FMCO could pose some downside risk to growth in 3Q21, we expect this to be mitigated by the low base effect, which is expected to lift GDP growth in 3Q21. Nevertheless, downside risks persist as COVID-19 cases remain elevated as the highly infectious Delta variant continues to spread. All in all, the best hope now is for the existing plan to work in curbing the ongoing spread, such that, by mid-3Q21, Malaysia can be on the road to recovery more forcefully once again.

Source: BIMB Securities Research - 16 Aug 2021