We expect 2Q21 GDP to expand by +15.0% YoY (consensus forecast: +12.7% YoY; 1Q21: -0.5% YoY) following the release of latest indicators. Apart from agriculture, other economic sectors are expected to post substantial growth owing largely to low base effect. Pending release of the actual 2Q21 GDP print, we keep our 2021 forecast unchanged at 4.0%.

Based on latest indicators, we now expect 2Q21 GDP to register +15.0% YoY, higher than consensus forecast of +12.7% YoY. 2Q21 GDP will be released on 13th Aug 2021.

2Q21 GDP: Despite the imposition of nationwide Phase 1 restrictions in Jun 2021, 2Q21 growth is anticipated to perform better than initially expected.

Industrial production index (IPI) surged to +22.6% YoY during the quarter (1Q21: +3.9% YoY), driven by higher manufacturing, mining and electricity production. Manufacturing activity remained robust, reflected by stronger growth in manufacturing IPI (+26.3% YoY; 1Q21: +6.8% YoY). Although only essential manufacturing industries were permitted to operate with 60% worker capacity, manufacturing production only posted a marginal decline in Jun 2021 (-0.2% YoY; 1Q21: +29.8% YoY). Meanwhile, the mining sector is expected to turnaround on better natural gas (+22.6% YoY; 1Q21: +0.7% YoY) and crude petroleum production (+5.9% YoY; 1Q21: -10.1% YoY). The construction sector is also expected to rebound sharply due to low base effect, supported by civil engineering works (+59.5% YoY; 1Q21: -22.3% YoY), non-residential (+37.0% YoY; 1Q21: -5.3% YoY) and residential buildings (+18.0% YoY; 1Q21: -4.2% YoY). Services will also be propped up by low base effect, reflected by the rebound in volume index of services (+17.6% YoY; 1Q21: -3.6% YoY). Barring the base effect, Phase 1 has negatively impacted the services sector, observed by the -3.0% QoQ decline in 2Q21 (1Q21: +2.3% QoQ). However, this drop was significantly smaller than that observed in 2Q20 (-20.7% QoQ) during MCO1.0. On the other hand, the agriculture sector is projected to contract as lower yields and prolonged labour crunch impacted palm oil production (-9.1% YoY; 1Q21: -5.4% YoY).

On the expenditure front, capital imports eased to +3.8% YoY (1Q21: +42.1% YoY), suggesting some weakening of gross fixed capital formation in 2Q21. Meanwhile, net export is expected to contribute to overall 2Q21 GDP due to stronger export and import performance, backed by robust external demand. While private consumption is expected to rebound from a low base, the magnitude of rebound is expected to be modest amid restricted mobility and slowing of labour market recovery during Phase 1. In addition, MIER’s Consumer Sentiment Index fell further below the 100-point optimism threshold (2Q21: 64.3; 1Q21: 98.9) as consumers lean towards cash conservation amid deterioration in current finances.

2021 GDP: While the robust external demand and ramp-up in vaccination rates offer some reprieve to Malaysia’s economy (as of 10th Aug, 39.5% of total adult population have been fully vaccinated, while government estimates 100% of total adult population would be fully vaccinated by end-Oct 21), the reopening timeline hinges on the success in containing the spread of symptomatic infection and reducing strain of ICU capacity utilisation across states. Pending release of the actual 2Q21 GDP print, we keep our 2021 forecast unchanged at 4.0% YoY. Following a more subdued growth trajectory in the near future, due to the current high Covid infection and hospitalisation rate, we lower our ringgit forecast to average USD/MYR 4.16 (previous: USD/MYR4.10; 2020: 4.20) for the year with an end-2021 target of USD/MYR 4.20.

Source: Hong Leong Investment Bank Research - 12 Aug 2021