Real GDP contracted by -4.5% YoY in 3Q21 (2Q21: +16.1% YoY), faring worse than our forecast (-4.3% YoY) and consensus estimate of -2.6% YoY. All sectors recorded negative growth, with economic activity particularly impacted in Jul under stricter National Recovery Plan (NRP) measures. On the demand front, growth was dragged by net exports, investment and private consumption activity, but slightly cushioned by higher public consumption and restocking activity. We downgrade our 2021 GDP forecast to +3. 5% YoY (previous: +4.1% YoY) and maintain our expectation for BNM to increase OPR by 25bps in 4Q22.

DATA HIGHLIGHTS

In 3Q21, real GDP contracted by -4.5% YoY in 3Q21 (2Q21: +16.1% YoY), faring worse than our forecast (-4.3% YoY) and consensus estimate of -2.6% YoY. Economic activity was particularly impacted in Jul (-7.6% YoY; Jun: -3.6% YoY) under Phase 1 NRP, but subsequently improved as more states progressed to less stringent phases by end-3Q21 (Aug: -4.7% YoY; Sep: -1.1% YoY). On a quarterly sa basis, GDP shrank for a second consecutive quarter (-3.6%; 2Q21: -1.9%). With this, Malaysia fell into a technical recession.

On the demand front, private consumption (-4.2% YoY; 2Q21: +11.7% YoY) and gross fixed capital formation (-10.8% YoY; 2Q21: +16.5% YoY) dipped, while public consumption continued to expand (+8.1% YoY; 2Q21: +9.0% YoY). Meanwhile, net exports contributed negatively to overall growth (-3.1ppt; 2Q21: +1.8ppt):

I. Private consumption declined (-4.2% YoY; 2Q21: +11.7% YoY), hampered by stringent containment measures and mobility restrictions. This was evident by the dip in transport (-36.7% YoY; 2Q21: +28.5% YoY), retail spending on clothing & footwear (-10.6% YoY; 2Q21; +26.1% YoY) and services like restaurants & hotels (-11.2% YoY; 2Q21: +9.2% YoY). However, essential spending for food & non-alcoholic beverages and housing utilities continued to grow;

II. Gross fixed capital formation also fell -10.8% YoY (2Q21: +16.5% YoY). By asset type, structure investment declined (-26.1% YoY; 2Q21: +20.2% YoY) due to the operating restrictions while machinery & equipment continued to grow (+10.2% YoY; 2Q21: +15.1% YoY) due to increase in capital spending for ICT equipment, especially for export-oriented firms. Sectorial wise, lower capital spending was recorded in public sector (-28.9% YoY; 2Q21: +12.0% YoY) following lower investment by the general government and public corporations, and private sector (-4.8% YoY; 2Q21: +17.4% YoY) from lower structure investment due to constraints on operating capacity;

III. Public consumption expanded at a moderate pace (+8.1% YoY; 2Q21: +9.0% YoY) following slower growth in emoluments and supplies & services, but was supported by pandemic-related expenditure;

IV. Net exports negatively contributed -3.1ppt to overall GDP (2Q21: +1.8ppt) as imports growth (+11.7% YoY; 2Q21: +37.6% YoY) outpaced exports (+5.1% YoY; 2Q21: +37.4% YoY).

On the Supply Side, All Sectors Recorded Negative Growth:

V. The agriculture sector contracted (-1.9% YoY; 2Q21: -1.5% YoY), as the prolonged labour crunch continued to impact palm oil production ( -11.1% YoY; 2Q21: -10.9% YoY). Aquaculture production also fell (-4.0% YoY; 2Q21: +0.5% YoY), offsetting the improvement in forestry & logging (+3.1% YoY; 2Q21: -1.1% YoY) and marine fishing (+2.6% YoY; 2Q21: +2.1% YoY);

VI. The mining sector declined (-3.6% YoY; 2Q21: +13.9% YoY) on the back of lower crude petroleum (-8.0% YoY; 2Q21: +4.9% YoY) and slowdown in natural gas production (+2.1% YoY; 2Q21: +21.9% YoY), mainly owing to closure of facilities for maintenance works, including the Gumusut -Kakap oilfield which contributes ~25% of total oil production;

VII. Manufacturing activity was mostly impacted by the tighter restrictions placed on non-essential industries. However, restrictions were relaxed in mid-Aug, allowing all industries to operate with capacity dependent on worker vaccination rate. Consequently, the sector posted a marginal contraction (- 0.8% YoY; 2Q21: +26.6% YoY), weighed down by non-essentials like tobacco products (-80.8% YoY; 2Q21: +94.3% YoY). This was partially offset by continued growth in refined petroleum products (+19.2% YoY; 2Q21: +34.0% YoY) and electronic components & boards, communication equipment and consumer electronics (+8.2% YoY; 2Q21: +27.9% YoY) following strong demand;

VIII. The construction sector posted the largest contraction (-20.6% YoY; 2Q21: +40.3% YoY) following lower construction activity across all secto rs: civil engineering (-36.1% YoY; 2Q21: +50.0% YoY); residential (-27.3% YoY; 2Q21: +16.3% YoY); non-residential (-13.3% YoY; 2Q21: +34.8% YoY). Only critical construction works were permitted with limited operating capacity;

IX. The decline in services sector (-4.9% YoY; 2Q21: +13.5% YoY) was attributed to weaker consumer-related activities, including motor vehicles (- 57.6% YoY; 2Q21: +28.3% YoY) and retail trade (-7.3% YoY; 2Q21: +21.4% YoY) amid mobility restrictions. Closure of inter-state borders also impacted tourism-related services like accommodation (-52.0% YoY; 2Q21: +45.9% YoY).

Current account (CA) surplus narrowed to RM11.6bn or 3.2% of GNI (2Q21: RM14.4bn or 4.0% of GNI) as the bigger surplus in goods account (RM41.2bn; 2Q21: RM40.7bn) and smaller deficit in secondary income account (-RM15.2bn; 2Q21: - RM15.4bn) was offset by larger deficits in primary income (-RM11.3bn; 2Q21: - RM9.5bn) due to lower investment income generated from overseas, and secondary income account (-RM3.1bn; 2Q21: -RM1.4bn) from higher outward remittances by foreign workers.

HLIB’S VIEW

Malaysia is expected to come out of the technical recession in 4Q21 as majority of states have progressed to Phase 4 of the NRP (As of 12th Nov: 85.6% of Malaysia’s GDP are in Phase 4; end-3Q21: 4.0% of GDP) with most economic activities permitted. Robust external demand will also continue to be a major growth driver, alongside the revival of tourism activities following the reopening of domestic and international borders in stages. Nevertheless, we expect the QoQ rebound in 4Q21 to be slightly capped, as consumers may remain cautious following the rise in number of infections domestically and in some major economies amid still elevated unemployment rate. Hence, we downgrade our 2021 GDP forecast to +3.5% YoY (previous: +4.1% YoY).

Despite 3Q21 GDP performance faring worse than consensus’ estimates, it was within BNM’s estimate. Consequently, BNM reaffirmed its 2021 GDP projection at 3.0 – 4.0% YoY. In 2022, they expect the growth momentum to improve further amid better labour market conditions (2022f: 4.0 – 5.0%; Sep 21: 4.5%) and continued policy support. During the press conference, Governor Datuk Nor Shamsiah reiterated that the Committee will be mindful of any premature withdrawal of monetary support. While BNM expects an economic recovery, inflationary pressures are expected to remain benign, driven by narrower but still negative output gap in 2022. BNM also shared that while global inflation is more prevalent in advanced economies, it is more limited in Malaysia due to varied inflationary dynamics. We opine that BNM will increase OPR by 25bps in 4Q2022 when economic recovery is more entrenched.

Source: Hong Leong Investment Bank Research - 15 Nov 2021