Real GDP slowed to +0.7% YoY in 1Q20 (4Q19: +3.6% YoY), in line with our revised forecast and better than the consensus estimate of -1.0% YoY. Growth decelerated sharply due to decline in agriculture, mining and construction alongside a slowdown in manufacturing and services sectors. On the demand front, slower growth stemmed from moderation in private consumption as well as weaker investment and net exports. Going forward, we expect growth to deteriorate further in 2Q20, when the brunt of Covid-19 will likely be felt, before recording a slow recovery in 2H20. For now, we maintain our 2020 GDP forecast at -6.0% YoY.

DATA HIGHLIGHTS

In 1Q20, real GDP decelerated to +0.7% YoY (4Q19: +3.6% YoY), the lowest growth since the GFC in 3Q09.

On the expenditure front, growth slowed due to moderation in private consumption (+6.7% YoY; 4Q19: +8.1% YoY), steeper decline in gross fixed capital formation (- 4.6% YoY; 4Q19: -0.7% YoY) and negative contribution from net exports (-3.2 ppt; 4Q19: -0.9 ppt):

I. Private consumption growth moderated to +6.7% YoY (4Q19: +8.1% YoY), owing to movement restrictions and social distancing measures implemented during the MCO period that started on 18th March. Growth was supported by consumption on food & non-alcoholic beverages, communication and housing utilities & fuels. These essential sub-sectors account for 46% of total private consumption. Private consumption also remained supported by higher wage growth in manufacturing (+3.4% YoY; 4Q19: +3.3% YoY). However, wage growth in the services sector (+1.4% YoY; 4Q19: +4.2% YoY) moderated sharply;

II. Gross fixed capital formation posted a steeper decline (-4.6% YoY; 4Q19: - 0.7% YoY) due to contraction in both public and private sectors amid weak investor sentiment. Private investment declined by -2.3% YoY (4Q19: +4.3% YoY). Investment by asset class also broadly contracted, reflected by lower structure investment (-4.0% YoY; 4Q19: +0.1% YoY) and machinery & equipment investment (-6.2% YoY; 4Q19: -2.6% YoY);

III. The drop in public investment steepened (-11.3% YoY; 4Q19: -8.0% YoY) due to delay in infrastructure projects amid the MCO;

IV. Public consumption accelerated to +5.0% YoY (4Q19: +1.3% YoY), driven by higher spending in supplies & services;

V. The deterioration in net exports contributed to the decline in GDP (-3.2 ppt; 4Q19: -0.9 ppt). Exports and imports contracted at a larger pace of -7.1% YoY (4Q19: -3.4% YoY) and -2.5% YoY (4Q19: -2.4% YoY) respectively. Exports were mostly dragged by weaker manufactured exports, while imports fell due to continued decline in capital imports.

On the sectoral front, the slowdown in GDP growth was due to decline in commodity and construction sectors and slower growth in manufacturing and services sectors:

VI. The agriculture sector contracted at a faster pace (-8.7% YoY; 4Q19: -5.7% YoY), largely due to the steeper drop in palm oil production (-22.0% YoY; 4Q19: -16.9% YoY), forestry & logging (-23.6% YoY; 4Q19: -19.0% YoY), marine fishing (-10.6% YoY; 4Q19: -3.0% YoY) and rubber (-18.3% YoY; 4Q19: +1.8% YoY). This could be due to mixture of supply disruption and MCO impact;

VII. The mining sector posted a smaller decline of -2.0% YoY (4Q19: -3.4% YoY), as slower contraction in crude oil production (-5.2% YoY; 4Q19: -6.3% YoY) was aided by marginal increase in natural gas production (+0.1% YoY; 4Q19: -2.6% YoY);

VIII. Growth in the manufacturing sector stood at +1.5% YoY (4Q19: +3.0% YoY), the lowest since 1Q13. Most manufacturing subsectors recorded weaker growth, excluding rubber products (+20.6% YoY; 4Q19: +6.3% YoY), electronic components & boards, communication equipment and consumer electronics (+3.8% YoY; 4Q19: +2.8% YoY), refined petroleum products (+3.7% YoY; 4Q19: +2.3% YoY) and chemical products (+2.3% YoY; 4Q19: +2.0% YoY);

IX. The construction sector sharply contracted (-7.9% YoY; 4Q19: +1.0% YoY) as all subsectors recorded lower growth, including residential buildings (-8.1% YoY; 4Q19: +3.0% YoY), non-residential buildings (-11.6% YoY; 4Q19: - 10.0% YoY), civil engineering (-5.1% YoY; 4Q19: +6.7% YoY) as well as specialized construction activities (-9.0% YoY; 4Q19: +4.5% YoY). This is the weakest growth since 2Q 1999;

X. Services sector growth slowed to +3.1% YoY (4Q19: +6.2% YoY). Excluding insurance and government services, all services subsectors recorded weaker growth. Accommodation (-4.2% YoY; 4Q19: +6.9% YoY), wholesale (+3.4% YoY; 4Q19: +5.9% YoY) and retail trade (+2.1% YoY; 4Q19: +7.3% YoY) were particularly affected by the imposition of MCO on 18th March 2020.

Current account (CA) surplus widened to RM9.5bn; 2.6% of GNI (4Q19: RM7.5bn; 2.0% of GNI) due to smaller deficit in primary (-RM6.0bn; 4Q19: -RM15.2bn) and secondary account (-RM5.4bn; 4Q19: -RM5.5bn) which offset the wider deficit in services account (-RM8.0bn; 4Q19: -RM4.0bn) and smaller surplus in goods account (RM28.9bn; 4Q19: RM32.3bn).

HLIB’S VIEW

Going forward, we expect GDP to record a negative print in 2Q20, when the brunt of Covid-19 impact will be felt due to full month of MCO on 1st Apr to 3rd May and Conditional MCO on 4th May to 9th June. During the latter period, while businesses are allowed to operate, companies need to adhere to standard operating guidelines with social distancing measures in place. This could dampen business income and lead businesses to implement cost cutting measures to stay afloat, resulting in lower wage gains and more employee layoffs. With income negatively affected and unemployment expected to pick up in 2Q20, the momentum of private consumption growth is also expected to soften. Meanwhile, investment and trade activity are expected to remain sluggish due to global lockdown measures and the highly uncertain economic environment.

On the sectoral front, manufacturing, services and construction sectors are expected to weaken further under MCO restrictions. The weakness in mining sector is also expected to extend in 2Q20 following Malaysia’s agreement to cut oil production by 136,000 bpd for May and June, as part of the 9.7 million bpd supply cut by OPEC+ to ease a global supply glut.

While a recovery is expected in 2H20, it is anticipated to be very sluggish. Post MCO, social distancing practices may remain, while some businesses in the services sector may not be allowed to operate at full capacity unless new infections decline significantly for a sustained period. In the 2H20, consumers and businesses who took up the loan moratorium will also need to start paying off their debt commitments. Going forward, the strength and timing of the recovery is also highly dependent on when a successful vaccine is found and made widely available. Hence, for now we maintain our expectation for 2020 GDP to weaken to -6.0% YoY (2019: +4.3% YoY).

Source: Hong Leong Investment Bank Research - 20 May 2020