We expect 3Q21 GDP to contract by -4.3% YoY (consensus forecast: -1.9% YoY; 2Q21: +16.1% YoY) following the release of latest indicators. As most states were still in stricter phases of the National Recovery Plan (NRP) in 3Q21 with the easing of economic restrictions only in the latter half of the quarter (mid-Aug onwards), broad-based contraction across all sectors is expected. Pending release of the actual 3Q21 GDP print, we keep our 2021 forecast unchanged at 4.1%.

Based on latest indicators, we now expect 3Q21 GDP to contract by -4.3% YoY, lower than consensus forecast of -1.9% YoY. 3Q21 GDP will be released on 12th Nov 2021.

3Q21 GDP: Growth is expected to weaken across all sectors as most states were still in Phase 1 and 2 of the NRP with tighter restrictions during the first half of the quarter.

Industrial production shrank -1.1% YoY in 3Q21 (2Q21: +22.6% YoY) following weaker manufacturing, mining and electricity production. Following this, manufacturing and mining GDP is expected to record a contraction in 3Q21. Tighter constraints on operating capacity during the first half of the quarter affected manufacturing production, which posted a -0.7% YoY decline (2Q21: +26.3% YoY). This was mostly due to the weak Jul showing (-6.5% YoY; Jun: -0.2% YoY), before returning to positive growth in Aug and Sep. Lower mining production (-2.2% YoY; 2Q21: +15.1% YoY) was attributed to the decline in crude petroleum production (-7.5% YoY; 2Q21: +5.9% YoY), while natural gas production slowed (+2.3% YoY; 2Q21: +22.6% YoY). Crude petroleum production may have been affected by the unplanned maintenance at the Gumusut-Kakap oilfield that was shut since Aug. Contraction is expected in the services sector as well. The volume index of services sank -7.5% YoY (2Q21: +17.7% YoY) owing to weakness in wholesale & retail trade, food & beverages and accommodation (-12.1% YoY; 2Q21: +20.2% YoY) and to a lesser extent, business services & finance (-3.5% YoY; 2Q21: +16.5% YoY) due to continued mobility restrictions and closure of state borders. The prolonged labour crunch has continued to impact palm oil production (-10.9% YoY; 2Q21: -9.1% YoY), which is likely to lead to another quarter of contraction for the agriculture sector.

On the expenditure front, net export is expected to contribute to overall 3Q21 GDP amid robust external demand, albeit at a more modest pace following the strong 2Q21 number which was aided by base effect. Meanwhile, private consumption is expected to weaken, as lockdown restrictions slowed the labour market recovery. Restrictions on high risk services have affected employment conditions in this sector, reflected by lower wage growth (-2.6% YoY; 2Q21: +0.4% YoY) and number of persons engaged (- 0.9% YoY; 2Q21: -0.7% YoY). Meanwhile, public consumption is projected to expand following the rollout of PEMULIH stimulus measures announced in end-Jun 2021. Capital imports jumped to +22.9% YoY (2Q21: +3.7% YoY), suggesting positive gross fixed capital formation in 3Q21.

2021 GDP: Going into the fourth quarter, the growth trajectory is anticipated to strengthen with the resumption of most economic activities, including the reopening of domestic and international borders with vaccinated travel lanes. As of 9th Nov, 95.0% of adults and 76.7% of adolescents have been fully vaccinated (75.5% of total population). Despite the high vaccination coverage, ICU admissions for Covid-19 cases has shown a recent upward trend in some states. While the wider economic reopening bodes well for overall growth, with majority of states now in Phase 4, this could also mean a higher virus resurgence risk, which could lead to some caution among consumers. Pending release of the actual 3Q21 GDP print, we maintain our 2021 forecast at 4.1% YoY (1-3Q average: 3.0% YoY).

Source: Hong Leong Investment Bank Research - 11 Nov 2021