Real GDP posted a smaller contraction of -2.7% YoY in 3Q20 (2Q20: -17.1% YoY), faring marginally better than our forecast (-3.0% YoY) and consensus estimate of -4.0% YoY. The contraction was led by construction, services and agriculture sectors that offset the growth in the manufacturing sector. On the demand front, contraction in domestic demand was partially offset by positive contribution from net exports. Going forward, we expect to see weaker GDP in 4Q20 due to extension of CMCO in most states. We lower our 2020 GDP forecast to -5.5% YoY from -5.0% YoY, followed by a +6.5% YoY rebound in 2021.

DATA HIGHLIGHTS

In 3Q20, real GDP posted a smaller contraction of -2.7% YoY (2Q20: -17.1% YoY). This brings 9M20 GDP to -6.4% YoY.

On the expenditure front, public consumption accelerated (+6.9% YoY; 2Q20: +2.3% YoY), while smaller decline was seen in private consumption (-2.1% YoY; 2Q20: - 18.5% YoY) and gross fixed capital formation (-11.6% YoY; 2Q20: -28.9% YoY). Meanwhile, net exports contributed +1.5ppt to overall growth (2Q20: -2.7ppt):

• Private consumption declined at a slower pace (-2.1% YoY; 2Q20: -18.5% YoY) as household spending picked up owing to improvements in employment and income conditions following resumption of economic activities under RMCO. Spending activity was also aided by government’s stimulus measures (eg. Bantuan Prihatin Nasional cash handouts, wage subsidy scheme and loan moratorium). On a quarterly sa basis, retail trade rebounded by +27.9% (2Q20: -22.4%). Nevertheless, private consumption remained weak as labour conditions have not returned to pre-pandemic levels. The unemployment rate remained elevated at 4.7% in 3Q20 after coming off its peak of 5.1% in 2Q20;
• Gross fixed capital formation also registered a smaller decline (-11.6% YoY; 2Q20: -28.9% YoY), supported by improvements in both public (-18.6% YoY; 2Q20: -38.7% YoY) and private investment (-9.3% YoY; 2Q20: -26.4% YoY). By asset class, investment in structures (-12.9% YoY; 2Q20: -41.2% YoY) improved amid resumption of construction activity, while the improvement in investment in machinery & equipment was relatively weak (-8.3% YoY; 2Q20: -11.1% YoY);
• Public consumption accelerated to +6.9% YoY (2Q20: +2.3% YoY), driven by higher spending on supplies & services and emoluments;
• Net exports contributed +1.5ppt to overall GDP (2Q20: -2.7ppt). While exports and imports remained in negative territory, the decrease in exports was smaller (-4.7% YoY; 2Q20: -21.7% YoY) relative to imports (-7.8% YoY; 2Q20: -19.7% YoY). Exports were supported by manufactured goods, while imports were supported by higher consumption imports.

On the sectoral front, manufacturing sector was the only bright spot, while other sectors posted negative growth:

• The agriculture sector recorded a slight contraction of -0.7% YoY (2Q20: +1.0% YoY) as palm oil      production slowed (+2.6% YoY; 2Q20: +7.5% YoY) due to labour shortages. Rubber production also weakened further (-24.0% YoY; 2Q20: -22.1% YoY), which offset improvements in livestock, aquaculture and other agriculture subsectors;
• The decline in mining sector slowed to -6.8% YoY (2Q20: -20.0% YoY) following smaller contractions in crude oil (-5.4% YoY; 2Q20: -21.5% YoY) and natural gas production (-7.7% YoY; 2Q20: -18.7% YoY) on the back of gradual recovery in oil and gas demand;
• Against better external demand conditions and more factories operating at higher capacity, the manufacturing sector rebounded by +3.3% YoY (2Q20: - 18.3% YoY). Broad-based improvement across subsectors were seen. Notable improvements include rubber products (+62.6% YoY; 2Q20: +47.8% YoY), driven by the surge in demand for rubber gloves during the pandemic, and electronic components & boards, communication equipment and consumer electronics (+10.2% YoY; 2Q20: -9.0% YoY) amid the push to digitalisation era;
• The decline in construction sector also eased (-12.4% YoY; 2Q20: -44.5% YoY) as construction activities resumed after the MCO. The pace of decline slowed in civil engineering (-16.7% YoY; 2Q20: -59.4% YoY), residential buildings (-12.3% YoY; 2Q20: -39.2% YoY) and non-residential buildings (- 16.4% YoY; 2Q20: -36.8% YoY) subsectors;
• While the services sector continued to decline, there was considerable improvement (-4.0% YoY; 2Q20: -16.2% YoY), supported by information & communication (+5.4% YoY; 2Q20: +4.9% YoY), motor vehicles (+5.7% YoY; 2Q20: -47.3% YoY) and finance (+7.9% YoY; 2Q20: -9.0% YoY). Meanwhile, tourism-related subsectors such as accommodation, food & beverage and retail trade continued to decline as international borders remained closed.

Current account (CA) surplus widened to RM26.1bn or 7.3% of GNI (2Q20: RM7.6bn; 2.5% of GNI) due to larger surplus in goods account (RM41.5bn; 2Q20: RM25.9bn) and positive balance in secondary income account (RM7.1bn; 2Q20: -RM1.9bn), which offset wider deficits in services account (-RM13.3bn; 2Q20: -RM12.5bn) and primary income account (-RM9.2bn; 2Q20: -RM4.0bn).

HLIB’S VIEW

Going forward, the extension of CMCO 2.0 to most states in Malaysia and the lapse of stimulus measures such as blanket loan moratorium alongside slow recovery in labour market conditions could bring about renewed weakness in economic activity in 4Q20. Nevertheless, the impact to economy may not be as severe as the rules set under the CMCO 2.0 (14th Oct – 6 th Dec) are less stringent compared to CMCO 1.0 from 4th May – 9 th Jun 2020. 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. We lower our 2020 GDP forecast to -5.5% YoY (previous: -5.0% YoY; 2019: +4.3% YoY), followed by a +6.5% YoY rebound in 2021.

BNM expects 2020 GDP to be at the lower end of the -3.5 to -5.5% YoY forecast as they have already incorporated a resurgent of Covid-19 cases into the forecast. In 2021, BNM expects growth to rebound by +7.5% - 8.5% YoY, supported by global economic recovery, private sector and fiscal support (2020e: +3-4 ppt to GDP; 2021 preliminary: 1.0ppt). Underlying this GDP projection is the assumption that Malaysia will continue to experience marginal setbacks along 2021 due to the absence of a widely available vaccine in Malaysia. Earlier release of vaccine to the public could push GDP to a higher forecast range (above 8.5% YoY).

Despite the re-introduction of CMCO 2.0, latest indicators point to an economic impact that is less severe compared to CMCO 1.0. In 2021, BNM believes that the economy will enter a phase of recovery. Hence, a targeted form of assistance would be more appropriate rather than a blanket approach. BNM shared that automatic loan moratorium boosted GDP by 1.0ppt. As of early Nov-20, 650k borrowers have applied for loan repayment assistance (9th Oct: 640k). On monetary policy front, BNM reiterated their stand that monetary policy remains accommodative in 2020 and 2021 following 125bps reduction in OPR and other liquidity measures that have been implemented. BNM estimates that 125bps OPR cut contributed 0.4-0.5ppt to 2020 GDP with higher estimates in 2021 due to lagged effect. We maintain our forecast for BNM to retain the OPR at 1.75% in 2021.

Source: Hong Leong Investment Bank Research - 16 Nov 2020