We expect 4Q20 GDP to contract by -3.8% YoY (consensus forecast: -3.9% YoY; 3Q20: -2.7% YoY) following the release of latest indicators. With the exception of manufacturing, all other economic sectors are anticipated to post a contraction. Should 4Q20 GDP release come in at the forecasted rate of -3.8% YoY, this would bring 2020 GDP to -5.7% YoY, slightly lower than our initial forecast of -5.5% YoY and government’s forecast range of -3.5% to -5.5%.

We expect 4Q20 GDP to contract by -3.8% YoY, slightly above the consensus forecast of -3.9%. 4Q20 GDP will be released on 11th Feb 2021. Should 4Q20 GDP release come in at the forecasted rate, this would bring 2020 GDP to -5.7% YoY.

4Q20 GDP: A deeper rate of contraction is expected during the quarter following the imposition of stricter lockdown measures. All economic sectors are projected to remain on a decline, with the exception of manufacturing.

On the sectoral front, the agriculture sector is projected to post a contraction owing to weaker palm oil production (-2.3% YoY; 3Q20: +2.5% YoY). Similarly, the mining sector will likely decline further following deeper contractions in production of crude oil (-12.5% YoY; 3Q20: -5.4% YoY) and natural gas (-8.9% YoY; 3Q20: -7.3% YoY) on the back of subdued global demand. While construction of residential (-10.9% YoY; 3Q20: -12.0% YoY) and non-residential buildings (-6.3% YoY; 3Q20: -16.0% YoY) recorded smaller rates of contraction, overall growth in the construction sector is expected to weaken further, weighed down by civil engineering activity (-25.0% YoY; 3Q20: -13.6% YoY). GDP contraction in 4Q20 is anticipated to be cushioned by the manufacturing sector, as manufacturing IPI continued to record positive growth, albeit at a more moderate pace (+2.8% YoY; 3Q20: +3.1% YoY). The expansion in export-oriented sector (+5.2% YoY; 3Q20: +4.6% YoY) offset the decline in domestic-oriented sector (-1.8% YoY; 3Q20: +0.4% YoY). Meanwhile, shorter business operating hours and reinstatement of interstate travel ban under CMCO2.0 will likely result in another quarter of decline for the services sector. Wholesale & retail trade, food & beverages and accommodation (-7.3% YoY; 3Q20: -6.5% YoY) and transportation & storage subsector (-24.0% YoY; 3Q20: -17.1% YoY) declined at a steeper pace in 4Q20.

On the expenditure front, the steeper decline in capital imports (-14.5% YoY; 3Q20: - 12.5% YoY) point towards continued weakness in gross fixed capital formation in 4Q20. Private consumption is expected to remain weak due to slowing of labour market recovery amid CMCO2.0. In 4Q20, the unemployment rate inched higher to 4.8% (3Q20: 4.7%). Number of employees engaged continued to decline in manufacturing (-2.0% YoY; 3Q20: -2.4% YoY) and services sector (-3.4% YoY; 3Q20: -2.0% YoY), as well as wages paid in both sectors (manufacturing: -1.2% YoY; 3Q20: -2.7% YoY, services: -4.5% YoY; 3Q20: -2.6% YoY). The drop in MIER’s Consumer Sentiments Index in 4Q20 (85.2; 3Q20: 91.5) also suggests consumers remain wary of spending amid soft labour market and weaker household finances. Meanwhile, net export is expected to contribute to overall 4Q20 GDP performance due to weak imports following muted domestic demand.

2021 GDP: The re-imposition of MCO2.0 is expected to pose downside risks to growth in 1Q21 owing to subdued demand and mobility. Nevertheless, its impact to activity will be less profound than MCO1.0 as more economic sectors are allowed to operate with higher capacities, longer operating hours and less stringent mobility restrictions. On the upside, faster growth could be expected in the subsequent quarters if vaccine rollout begins sooner than expected with minimal hiccups in vaccine distribution. Hence, we maintain 2021 GDP forecast at +5.0% YoY.

Source: Hong Leong Investment Bank Research - 11 Feb 2021