We expect 1Q21 GDP to register 0% YoY (consensus forecast: -0.2% YoY; 4Q20: -3.4% YoY) following the release of latest indicators. With the exception of manufacturing, most economic sectors are anticipated to post a contraction, albeit at a slower pace. Pending release of the actual 1Q21 GDP print, we keep our 2021 forecast unchanged at 5.0%.

We expect 1Q21 GDP to register 0% YoY, above the consensus forecast of -0.2% YoY. 1Q21 GDP will be released on 11th May 2021.

1Q21 GDP: Economic activity started the year on a weak note when MCO2.0 was imposed. Industrial production recorded modest growth of +1.3% YoY in Jan and Feb 21 (Dec 20: +1.7% YoY). Nevertheless, as economic activity reopened and owning to base effect, industrial production activity picked up by +9.3% YoY in Mar, pulling up 1Q21 into growth territory (1Q21: +3.9% YoY; 4Q20: -0.4% YoY).

Throughout the quarter, manufacturing remained a bright spark as growth in manufacturing IPI strengthened (+6.8% YoY; 4Q20: +2.8% YoY). Both export oriented (+9.1% YoY; 4Q20: +5.2% YoY) and domestic-oriented sectors (+2.6% YoY; 4Q20: -1.8% YoY) recorded improved performance in 1Q21. During the start of the year, the services sector was impacted by MCO2.0 when interstate travel ban was reinstated and business operating hours were shortened, albeit by a smaller magnitude. Towards the end of the quarter however, states reverted back to CMCO/RMCO which boosted economic performance. Consequently, smaller decline was seen in ‘wholesale & retail trade, food & beverages and accommodation’ (-3.8% YoY; 4Q20: -7.3% YoY) and information & ‘communication and transportation & storage’ subsector (-2.0% YoY; 4Q20: -5.6% YoY), while ‘business services & finance’ marginally rebounded (+0.2% YoY; 4Q20: -4.0% YoY). The mining sector is expected to post a smaller rate of contraction due to slight rebound in natural gas production (+0.7% YoY; 4Q20: -9.5% YoY) and slower decline in crude petroleum production (-10.1% YoY; 4Q20: -13.0% YoY). On the other hand, the agriculture sector is projected to post a larger contraction as heavy rainfall in Jan and Feb impacted palm oil production (-5.4% YoY; 4Q20: -2.4% YoY),

On the expenditure front, the rebound in capital imports (+42.1% YoY; 4Q20: -14.5% YoY) suggests better performance in gross fixed capital formation in 1Q21. Meanwhile, net export is expected to contribute to overall 1Q21 GDP due to stronger export and import performance, owing to improvement in global trade activity. Private consumption is expected to remain modest due to slow labour market recovery amid MCO 2.0. The unemployment rate remained elevated at 4.8% in 1Q21 (4Q20: 4.8%). Number of employees engaged continued to decline, albeit at a slower pace, in manufacturing (-1.1% YoY; 4Q20: -2.0% YoY) and services sector (-2.2% YoY; 4Q20: -3.4% YoY), as well as wages paid in both sectors (manufacturing: -0.6% YoY; 4Q20: -1.3% YoY, services: -3.1% YoY; 4Q20: -4.6% YoY). While MIER’s Consumer Sentiments Index increased in 1Q21 (98.9; 4Q20: 85.2) following the kick off of the National Immunisation Programme and better financial and employment expectations, the index is still below the 100-point optimism threshold, suggesting consumers remained conservative.

2021 GDP: While the current 2-week imposition of MCO3.0 (in Klang Valley) could pose some downside risk to growth in 2Q21, it is expected to be mitigated by low base effect from weak GDP that began in mid-Mar 2020, which is expected to lift GDP growth in 2Q21 onwards. On the upside, faster growth could be expected in the subsequent quarters if global growth picks up further and vaccine rollout progresses faster than expected. Pending release of the actual 1Q21 GDP print, we keep our 2021 forecast unchanged at 5.0%.

Source: Hong Leong Investment Bank Research - 17 May 2021