Real GDP recorded a marginal decrease of -0.5% YoY in 1Q21 (4Q20: -3.4% YoY), lower than our forecast (0% YoY) and consensus estimate of -0.2% YoY. Most economic sectors contracted at a smaller rate, while manufacturing and agriculture sectors were in positive growth territories. On the demand front, domestic demand improved, while net exports contributed to GDP by a smaller magnitude. While 2021 growth outlook remains clouded by pandemic-related challenges, there could be some upside risk from stronger-than-expected external demand. For now, we maintain 2021 GDP at +5.0% YoY, taking into account fluidity of policy response that could be enhanced further in light of the resurgence of Covid-19 infections.

DATA HIGHLIGHTS

In 1Q21, real GDP posted a marginal contraction of -0.5% YoY (4Q20: -3.4% YoY), lower than our forecast of 0% YoY and consensus estimate of -0.2% YoY. On a quarterly sa basis, GDP rebounded by +2.7% (4Q20: -1.5%) as MCO2.0 was subsequently replaced by CMCO and RMCO towards the end of 1Q21.

On the expenditure front, private consumption (-1.5% YoY; 4Q20: -3.5% YoY) and gross fixed capital formation (-3.3% YoY; 4Q20: -11.8% YoY) recorded smaller rates of contraction as public consumption accelerated (+5.9% YoY; 4Q20: +2.4% YoY). Meanwhile, net exports contributed +0.05ppt to overall growth, down from +0.6ppt in 4Q20:

I. Private consumption declined at a slower pace (-1.5% YoY; 4Q20: -3.5% YoY) as household spending was constrained by tighter mobility restrictions under MCO2.0, albeit by a smaller extent. Positive growth was seen for essential expenditure such as food & non-alcoholic beverages, housing, utilities & fuels and communication, while non-essential expenditure for recreation services & culture and restaurants & hotels posted smaller negative growth. On a quarterly sa basis, private consumption rebounded by +4.7% (4Q20: -1.5%). In line with this, retail trade growth also turned around (+2.5%; 4Q20: -0.8%);

II. Gross fixed capital formation growth improved, albeit still negative (-3.3% YoY; 4Q20: -11.8% YoY), supported by higher investments in machinery & equipment (+10.3% YoY; 4Q20: -9.0% YoY) and smaller decline in structure investments (-10.4% YoY; 4Q20: -13.2% YoY). Sectoral wise, private investment rebounded (+1.3% YoY; 4Q20: -6.6% YoY) while public investment continued to post double-digit decline (-18.6% YoY; 4Q20: - 20.4% YoY);

III. Public consumption accelerated to +5.9% YoY (4Q20: +2.4% YoY), supported by higher spending on emoluments and supplies & services;

IV. Net exports contributed +0.05ppt to overall GDP (4Q20: +0.6ppt) as imports (+13.0% YoY; 4Q20: -3.3% YoY) and exports (+11.9% YoY; 4Q20: -2.1% YoY) strengthened following better external and domestic demand.

On the sectoral front, most economic sectors contracted at a smaller rate, while manufacturing and agriculture sectors were in positive growth territories:

V. The agriculture sector rebounded by +0.4% YoY (4Q20: -1.0% YoY) following expansions in forestry & logging (+11.5% YoY; 4Q20: -9.2% YoY), livestock (+3.5% YoY; 4Q20: +2.9% YoY) and other agriculture (+5.7% YoY; 4Q20: +3.6% YoY). Meanwhile, palm oil production declined (-3.5% YoY; 4Q20: - 2.4% YoY) due to unfavourable weather conditions;

VI. The decline in mining sector (-5.0% YoY; 4Q20: -10.4% YoY) was partly mitigated by marginal rebound in natural gas production (+0.3% YoY; 4Q20: - 9.9% YoY), while crude oil production decreased at a slightly slower pace (- 11.5% YoY; 4Q20: -12.9% YoY);

VII. The manufacturing sector strengthened to +6.6% YoY (4Q20: +3.0% YoY) driven by strong demand for E&E products, including electronic components & boards, communication equipment and consumer electronics (+12.4% YoY; 4Q20: +9.3% YoY) and computers & peripheral equipment (+9.3% YoY; 4Q20: +9.2% YoY). The extension of SST exemption for passenger cars to 30th June 2021 has also led to higher growth in motor vehicles & transport equipment subsector (+9.4% YoY; 4Q20: +8.2% YoY). Demand for rubber products also remained robust (+70.3% YoY; 4Q20: +66.2% YoY);

VIII. The construction sector contracted at a slower pace (-10.4% YoY; 4Q20: - 13.9% YoY), aided by implementation of small-scale projects and speeding up of commercial projects nearing completion. Apart from specialised construction activities (+16.9% YoY; 4Q20: +9.4% YoY), other subsectors such as residential (-4.7% YoY; 4Q20: -11.0% YoY), non-residential (-5.9% YoY; 4Q20: -6.6% YoY) and civil engineering (-28.8% YoY; 4Q20: -32.7% YoY) posted smaller rates of decline;

IX. The services sector continued to be impacted by MCO2.0, albeit by a smaller magnitude (-2.3% YoY; 4Q20: -4.8% YoY), cushioned by recovery in wholesale (+0.6% YoY; 4Q20: -0.8% YoY) and retail trade (+0.8% YoY; 4Q20: -3.0% YoY). Restrictions on international and interstate travels continued to weigh on accommodation (-59.1% YoY; 4Q20: -61.2% YoY), food & beverage (-23.2% YoY; 4Q20: -29.2% YoY) and transportation & storage subsectors (-16.2% YoY; 4Q20: -23.0% YoY).

Current account (CA) surplus narrowed to RM12.3bn or 3.4% of GNI (4Q20: RM18.6bn or 5.0% of GNI) as smaller deficit in primary income account (-RM5.7bn; 4Q20: -RM7.2bn) was offset by smaller surplus in goods account (RM21.7bn; 4Q20: RM28.5bn) as well as larger deficit in services account (-RM15.0bn; 4Q20: - RM14.0bn) and secondary income account (-RM3.6bn; 4Q20: -RM2.7bn).

HLIB’S VIEW

Following the rapid spread of Covid-19 infections in recent weeks, MCO3.0 was expanded nationwide for a period of 27 days from 12th May – 7th June 2021. While this is expected to impact growth in 2Q21, double-digit growth is still expected for the quarter due to low base effect from weak GDP that began in mid-Mar 2020. Overall, while risks to the outlook remain tilted to the downside from pandemic-related challenges, there could be some upside risks as well, stemming from stronger-than expected external demand and faster-than-expected vaccination progress globally and domestically. Nevertheless, for now, we maintain our 2021 GDP forecast at +5.0% YoY, taking into account fluidity of policy response that could be enhanced further in response to current high Covid-19 cases and increasingly strained hospital resources.

BNM opines that growth will remain within their forecast range of 6.0 – 7.5% YoY as MCO3.0 is similar to MCO2.0 where most economic activities are allowed, adding that economic loss in MCO2.0 was less than initially expected (RM300m/day). Despite weak labour conditions, BNM expects targeted policy measures (i-Sinar, wage subsidy, Bantuan Prihatin Rakyat) to remain supportive of private consumption in 1H 2021. They reiterated that monetary policy stance will be determined by new data and information, given ongoing uncertainties surrounding the pandemic. We maintain our expectation for BNM to maintain OPR at 1.75% in 2021.

Source: Hong Leong Investment Bank Research - 11 May 2021