Real GDP Plunged by -17.1% YoY in 2Q20 (1Q20: +0.7% YoY), Faring Slightly Better Than Our Forecast (-18.5% YoY) But Worse Than the Consensus Estimate of -11.1% YoY. Apart From Agriculture, All Sectors Recorded Double-digit Contraction Due to the MCO. On the Demand Front, the Contraction Was Attributed to Steep Decline in Private Consumption, Investments as Well as Net Exports. Going Forward, We Expect the Decline in GDP Growth to Ease as Economic Activity Reopens on the Global and Domestic Front. We Maintain Our 2020 GDP Forecast at -5.0% YoY.

DATA HIGHLIGHTS

In 2Q20, real GDP plunged by -17.1% YoY (1Q20: +0.7% YoY), the lowest growth on record (Asian Financial Crisis trough in 4Q98: -11.2% YoY).

On the expenditure front, the plunge stemmed from steep decline in private consumption (-18.5% YoY; 1Q20: +6.7% YoY), gross fixed capital formation (-28.9% YoY; 1Q20: -4.6% YoY) and negative contribution from net exports (-2.7ppt; 1Q20: - 3.2ppt):

• I. Private consumption (-18.5% YoY; 1Q20: +6.7% YoY) was severely impacted by movement restrictions implemented during the quarter, alongside lower employment and reduced income levels due to weak labour market conditions. The unemployment rate spiked to 5.1% (1Q20: 3.5%), while wage growth declined in manufacturing (-4.0% YoY; 1Q20: +3.4% YoY) and services sector (-6.4% YoY; 1Q20: +1.4% YoY). Towards the end of 2Q20, retail trade activity showed some improvement (June: +18.8% MoM; May: +32.9% MoM), which could be aided by the government’s stimulus measures (Bantuan Prihatin Nasional cash handouts and loan moratorium);
• II. Gross fixed capital formation posted a steeper decline (-28.9% YoY; 1Q20: - 4.6% YoY), dragged by lower capital spending in both public and private sectors amid weak investor sentiment and MCO. Private investment declined by -26.4% YoY (1Q20: -2.3% YoY), while public investment dropped by - 38.7% YoY (1Q20: -11.3% YoY). By asset class, structure investment (-41.2% YoY; 1Q20: -4.0% YoY) and machinery & equipment investment (-11.1% YoY; 1Q20: -6.2% YoY) fell at a faster pace. The drop in public investment steepened due to delay in infrastructure projects amid the MCO;
• III. Public consumption slowed to +2.3% YoY (1Q20: +5.0% YoY), supported by continued increase in emoluments amid lower spending on supplies & services;
• IV. Net exports contracted from overall GDP, albeit by a smaller magnitude (- 2.7ppt; 1Q20: -3.2ppt). Exports and imports fell at a larger pace of -21.7% YoY (1Q20: -7.1% YoY) and -19.7% YoY (1Q20: -2.5% YoY) respectively. Exports were dragged by weakness in manufactured and commodity-related exports, while imports mainly fell due to lower intermediate and consumption imports.

On the sectoral front, GDP plunged on account of double-digit contraction across all sectors, with the exception of agriculture:

• V. Agriculture sector was the only bright spot, posting a rebound (+1.0% YoY; 1Q20: -8.7% YoY) due to the turnaround in palm oil production (+7.5% YoY; 1Q20: -22.0% YoY), driven by recovery in fresh fruit bunches yields. This offset the steep decline in forestry & logging, rubber and marine fishing sub sectors;
• VI. The mining sector shrank -20.0% YoY (1Q20: -2.0% YoY), as maintenance and weak demand during the MCO led to lower crude oil (-21.5% YoY; 1Q20: -5.2% YoY) and natural gas production (-18.7% YoY; 1Q20: +0.1% YoY);
• VII. The manufacturing sector recorded an -18.3% YoY contraction (1Q20: +1.5% YoY) due to MCO restrictions as well as weak external and domestic demand. During the stringent MCO that extended to April, firms in essential sub-sectors operated below capacity to adhere to social distancing measures, resulting in cutbacks in production, while other non-essential sub-sectors were only allowed to operate under the Conditional MCO in May. Weaker manufacturing activity was observed across all sub-sectors, excluding vegetable and animal oils & fats;
• VIII. Growth in the construction sector plummeted (-44.5% YoY; 1Q20: -7.9% YoY) following delays in construction works during the MCO. All subsectors recorded lower growth, including residential buildings (-39.2% YoY; 1Q20: - 8.1% YoY), non-residential buildings (-36.8% YoY; 1Q20: -11.6% YoY), civil engineering (-59.4% YoY; 1Q20: -5.1% YoY) as well as specialized construction activities (-29.8% YoY; 1Q20: -9.0% YoY);
• IX. Services sector growth declined by -16.2% YoY (1Q20: +3.1% YoY), largely weighed down by consumption and tourism-related services. Significant contractions were recorded in accommodation (-78.9% YoY; 1Q20: -4.2% YoY), transportation & storage (-44.8% YoY; 1Q20: -2.7% YoY), food & beverage (-31.5% YoY; 1Q20: +3.1% YoY) and retail trade (-20.9% YoY; 1Q20: +2.1% YoY), owing to the nationwide MCO and restrictions on domestic and international travel.

Current account (CA) surplus narrowed to RM7.6bn; 2.5% of GNI (1Q20: RM9.5bn; 2.6% of GNI) due to larger deficit in services account (-RM12.5bn; 1Q20; -RM8.0bn) and smaller surplus in goods account (RM25.9bn; 1Q20: RM28.9bn), which offset smaller deficits in primary (-RM4.0bn; 1Q20: -RM6.0bn) and secondary income account (-RM1.9bn; 1Q20: -RM5.4bn)

HLIB’S VIEW

Going forward, as the economy reopens alongside continuous policy support, we expect the decline in GDP to ease in 2H20. Nevertheless, while the stimulus such as loan moratorium has been extended, it only applies to a targeted group (3mn; automatic loan moratorium: 7.7mn), which could pose some downside risk to recovery, especially in 4Q20 GDP. In addition, the composition of available jobs may be more temporary in nature and weak wage growth could also dampen the durability of consumption uptrend. Overall, the strength of economic recovery remains largely dependent on the success of containment measures and medical solution in curbing the spread of Covid-19. A sharp resurgence in global and domestic infections and potential re-imposition of targeted MCO continue to pose downside risks to overall GDP growth for the year. Consequently, we maintain our expectation for 2020 GDP to weaken to -5.0% YoY (2019: +4.3% YoY).

Going into 2H20, BNM expects growth to improve, but cautioned that it is anticipated to remain sluggish and uneven. Due to the possibility of downside risks arising from persistent weakness in global growth and more widespread Covid-19 infection, BNM downgraded 2020 GDP forecast to -3.5% to -5.5% YoY from -2.0% to +0.5% YoY (1H20: -8.2% YoY). In the central baseline, BNM anticipates GDP to return to pre Covid levels in 2021, and anticipates a sizeable output gap going into 2021. BNM opined that the balance of risks remains unchanged from previous May and July MPC meetings and reiterated that monetary policy is dependent on incoming growth and inflation data as well as the balance of risks. We maintain our expectation for BNM to reduce the OPR by 25bps in 2H20.

Source: Hong Leong Investment Bank Research - 24 Aug 2020