We expect 4Q21 GDP to turnaround and expand by +3.6% YoY (consensus forecast: +3.1% YoY; 3Q21: -4.5% YoY) following the easing of most economic restrictions and reopening of interstate borders. Apart from construction and mining, other economic sectors are projected to post a recovery. Should 4Q21 GDP print come in at our forecasted rate of +3.6% YoY, this would bring 2021 GDP to +3.1% YoY, lower than our initial forecast of +3.5% YoY and within government’s forecast range of 3.0% to 4.0%.

Based on latest indicators, we now expect 4Q21 GDP to expand by +3.6% YoY, higher than consensus median forecast of +3.1% YoY. 4Q21 GDP will be released on 11 Feb 2022.

4Q21 GDP: Positive growth is expected as most states transitioned to Phase 4 of the NRP, allowing for easing of most economic restrictions.

The manufacturing sector is expected to drive 4Q21 GDP growth, as production strengthened in 4Q21 (+9.2% YoY; 3Q21: -0.7% YoY) in both domestic (+6.9% YoY; 3Q21: -14.8% YoY) and export-oriented sectors (+10.3% YoY; 3Q21: +6.5% YoY) amid improvement in demand conditions. The agriculture sector is also expected to post a rebound. Despite the impact from prolonged labour shortages and severe flooding in Dec, palm oil production increased in 4Q21 by +6.2% YoY (3Q21: -10.9% YoY) due to low base effect. Likewise, for services, positive growth is anticipated in line with the increase in volume index of services (+3.0% YoY; 3Q21: -7.5% YoY). The increase in mobility and reopening of interstate borders has helped drive improvements in wholesale & retail trade, food & beverages and accommodation subsectors. Meanwhile, another quarter of contraction is expected for the construction and mining sectors. The value of construction work done continued to fall in 4Q21 (-12.9% YoY; 3Q21: -21.0% YoY) amid lower construction activity in the civil engineering, residential and non-residential space. Mining production declined at a slower pace during the quarter (-0.8% YoY; 3Q21: -2.2% YoY), as higher natural gas production (+3.8% YoY; 3Q21: +2.3% YoY) partly offset the drag in crude petroleum production (-6.7% YoY; 3Q21: -7.5% YoY), possibly due to unplanned maintenance works at the Gumusut-Kakap oilfield.

On the expenditure front, Malaysia’s strong net export performance is expected to contribute to overall 4Q21 GDP, driven by robust external demand for semiconductors and elevated commodity prices. Meanwhile, private consumption is expected to turn positive, supported by reopening of economic activity and increased tourism spending amid improvements in labour market conditions. This is reflected by increased wage growth in manufacturing (+4.7% YoY; 3Q21: +2.3% YoY) and services sectors (+1.2% YoY; 3Q21: -2.6% YoY), as well as downtrend in unemployment rate (4.3%; 3Q21: 4.7%). Capital imports continued to grow (+22.7% YoY; 3Q21: +22.9% YoY), pointing to positive gross fixed capital formation in 4Q21.

2022 GDP: Positive growth momentum is expected to continue in 2022 with further normalisation of economic activities. While manufacturing activity may be affected by supply chain disruptions and raw material shortages, the sector is expected to continue its growth. The continued recovery in labour market and possible reopening of international travel without quarantine would lend further support to the economy. While headwinds may persist from continued virus prevalence leading to cautious sentiment among businesses and consumers, this may be partly mitigated by acceleration in booster vaccinations and healthcare capacities sustaining at manageable levels. We maintain our 2022 GDP forecast at +5.5% YoY (2021f: +3.1% YoY).

Source: Hong Leong Investment Bank Research - 10 Feb 2022