Real GDP posted a larger contraction of -3.4% YoY in 4Q20 (3Q20: -2.6% YoY), faring better than our forecast (-3.8% YoY) and consensus estimate of -3.9% YoY. All economic sectors continued to contract, with the exception of manufacturing. On the demand front, domestic demand declined at a faster pace, while net exports contributed to GDP by a smaller magnitude. In 2020, real GDP contracted by -5.6% YoY, slightly below our forecast of -5.5% YoY (2019: +4.3% YoY). While the re-imposition of MCO2.0 poses some downside risks to 2021 growth, especially in 1Q21, there could also be upside risks to the year forecast from earlier-than-expected mass vaccination programme globally and domestically. We maintain 2021 GDP at +5.0% YoY and expect a 25bps cut to OPR in 1H21.

DATA HIGHLIGHTS

In 4Q20, real GDP posted a larger contraction of -3.4% YoY (3Q20: -2.6% YoY), above our forecast of -3.8% YoY and consensus estimate of -3.9% YoY. For the full year 2020, real GDP contracted by -5.6% YoY, slightly below our forecast of -5.5% YoY.

On the expenditure front, gross fixed capital formation (-11.9% YoY; 3Q20: -11.6% YoY) and private consumption (-3.4% YoY; 3Q20: -2.1% YoY) posted steeper contractions, while public consumption slowed (+2.7% YoY; 3Q20: +6.9% YoY). Meanwhile, net exports contributed +0.7ppt to overall growth, down from +1.5ppt in 3Q20:

• Private consumption declined at a faster pace (-3.4% YoY; 3Q20: -2.1% YoY) as spending activity was constrained by tighter mobility restrictions under CMCO2.0. The decline mainly stemmed from lower consumption of non-essentials like restaurants & hotels, recreation services & cultural and furnishing, household equipment & maintenance, while consumption of essentials such as food & non-alcoholic beverages, housing, utilities & fuels and communication registered better growth. The weak private consumption could also be attributed to the soft labour market, which saw an uptick in unemployment rate (4.8%; 3Q20: 4.7%). On a quarterly sa basis, retail trade growth sharply decelerated (+0.2%; 3Q20: 27.5%);
• Gross fixed capital formation registered a slightly steeper decline ( -11.9% YoY; 3Q20: -11.6% YoY), driven by weaker investments in structures (- 13.1% YoY; 3Q20: -12.9% YoY) and machinery & equipment (-9.0% YoY; 3Q20: -8.3% YoY). Sectoral wise, the decline in public investment steepened (-19.8% YoY; 3Q20: -18.6% YoY), but softened for private investment (-7.0% YoY; 3Q20: -9.3% YoY);
• Public consumption expanded at a more moderate pace (+2.7% YoY; 3Q20: +6.9% YoY), supported by spending in emoluments;
• Net exports contributed +0.7ppt to overall GDP (3Q20: +1.5ppt). Exports (- 1.8% YoY; 3Q20: -4.7% YoY) and imports (-3.3% YoY; 3Q20: -7.8% YoY) posted smaller rates of contraction. Exports were supported by manufactured goods, while imports were supported by higher intermediate imports.

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

• The agriculture sector recorded a slight contraction of -0.7% YoY (3Q20: - 0.5% YoY) following lower palm oil production (-2.4% YoY; 3Q20: +2.6% YoY) due to continued labour shortages and unfavourable weather conditions. Continued weakness in rubber and forestry & logging subsectors also weighed on growth for the sector;
• The decline in mining sector steepened (-10.6% YoY; 3Q20: -6.8% YoY) as crude oil (-12.7% YoY; 3Q20: -5.4% YoY) and natural gas production (-9.2% YoY; 3Q20: -7.7% YoY) sank further. This could be due to disruptions at Petronas’ Miri and Cendor crude oil supplies in late Oct;
• The manufacturing sector continued to expand, albeit at a softer pace (+3.0% YoY; 3Q20: +3.3% YoY). Strong demand for rubber gloves during the pandemic has continued to drive growth in rubber products (+66.4% YoY; 3Q20: +62.6% YoY). Meanwhile, high global demand for semiconductor components has led to robust growth in the E&E sector. Electronic components & boards, communication equipment and consumer electronics (+9.5% YoY; 3Q20: +10.2% YoY) and computers & peripheral equipment (+9.4% YoY; 3Q20: +12.3% YoY) continued to grow;
• The construction sector weakened (-13.9% YoY; 3Q20: -12.4% YoY) on the back of labour shortages and pandemic-related shutdown of some construction sites. The decline was most prominent in the civil engineering space (-32.7% YoY; 3Q20: -16.7% YoY), while residential (-11.0% YoY; 3Q20: -12.3% YoY) and non-residential subsectors (-6.6% YoY; 3Q20: - 16.4% YoY) saw smaller rates of decline; IX. Shorter operating hours, stricter SOPs and tighter mobility restrictions have led to a steeper decline in the services sector (-4.9% YoY; 3Q20: -4.0% YoY). The decline was mainly attributed to weaker retail trade (-3.1% YoY; 3Q20: -2.4% YoY), while weak tourism activity due to closure of international borders weighed on accommodation (-61.2% YoY; 3Q20: -53.9% YoY), food & beverage (-29.2% YoY; 3Q20: -23.2% YoY) and transportation & storage subsectors (-23.1% YoY; 3Q20: -16.6% YoY).

Current account (CA) surplus narrowed to RM19.0bn or 5.1% of GNI (3Q20: RM26.1bn; 7.3% of GNI) due to larger deficit in services account (-RM14.2bn; 3Q20: -RM13.3bn) and negative balance in secondary income account (-RM2.5bn; 3Q20: RM7.5bn), which offset wider surplus in goods account (RM42.9bn; 3Q20: RM41.5bn) and smaller deficit in primary account (-RM7.1bn; 3Q20: -RM9.2bn).

HLIB’S VIEW

Given the weaker growth momentum in 4Q20 under CMCO2.0, we expect to see continued weaknesses in 1Q21 with the re-imposition of MCO2.0. Nevertheless, its impact to economic activity will be less severe than MCO1.0 (MCO 2.0: MOF estimate loss of RM0.7bn/day ; MCO 1.0: loss of RM2.4bn/day) with more sectors given the green light to operate with higher capacities and longer operating hours. Overall, while there continues to be considerable downside risks to the growth outlook, there could be upside risks as well, stemming from sooner-than-expected mass vaccine rollout globally and domestically. Hence, we maintain our 2021 GDP forecast at +5.0% YoY.

BNM is still projecting a recovery for 2021 and is currently reviewing the official forecast, which will be announced in their Annual Report on 24th Mar 2021. Currently, MOF official forecast stands at 6.5-7.5% YoY. BNM opines 1Q21 is expected to be challenging, as policy measures in place (e.g. wage subsidy, targeted repayment assistance, i-Sinar) are not expected to fully offset the negative repercussions of MCO2.0. BNM reiterated their readiness to utilise various policy levers such as OPR, SRR, as well as more targeted measures (e.g. targeted repayment assistance, specific funds for targeted sectors) and emphasized the need to complement it with fiscal and supply side policies. We maintain our expectation for BNM to reduce OPR by 25bps to 1.50% in 1H21.

Source: Hong Leong Investment Bank Research - 15 Feb 2021