Real GDP returned to expansion in 4Q21 (+3.6% YoY; 3Q21: -4.5% YoY), matching our forecast and faring better than consensus estimate of +3.3% YoY. All sectors excluding mining and construction registered a rebound. On the demand front, growth was supported by higher private consumption, net exports and restocking activity. 2021 GDP came in at +3.1% YoY, also in line with our forecast. For now, we maintain our 2022 GDP forecast at +5.5% YoY and for BNM to increase OPR by 25bps in 4Q22.

DATA HIGHLIGHTS

In 4Q21, real GDP rebounded by +3.6% YoY (3Q21: -4.5% YoY), matching our forecast and faring better than consensus estimate of +3.3% YoY. The easing of economic restrictions led to three consecutive months of positive GDP growth (Oct: +2.7% YoY; Nov: +5.4% YoY; Dec: +2.6% YoY) and expansion on a quarterly sa basis (+6.6%; 3Q21: -3.6%).

On the demand front, growth was driven by improvement in household spending and trade activity, reflected by rise in private consumption (+3.7% YoY; 3Q21: -4.2% YoY) and positive net exports contribution (+0.2ppt; 3Q21: -3.1ppt). Public consumption eased (+4.3% YoY; 3Q21: +8.1% YoY), while gross fixed capital formation continued to decline (-3.3% YoY; 3Q21: -10.8% YoY):

I. The increase in private consumption (+3.7% YoY; 3Q21: -4.2% YoY) was apparent in higher non-discretionary spending on recreation services & culture (+4.3% YoY; 3Q21: -5.1% YoY) and restaurants & hotels (+3.8% YoY; 3Q21: -11.2% YoY) as consumers increased spending following easing of containment measures. At the same time, better labour market conditions has helped support spending activity;

II. Gross fixed capital formation declined at a softer pace (-3.3% YoY; 3Q21: - 10.8% YoY). By asset type, structure investment posted a smaller contraction (-15.5% YoY; 3Q21: -26.1% YoY) while machinery & equipment accelerated (+16.4% YoY; 3Q21: +10.2% YoY). Sectorial wise, slower decline in capital spending was recorded in public sector (-3.8% YoY; 3Q21: -28.9% YoY), supported by capital spending by the general government and public corporations, and private sector (-3.0% YoY; 3Q21: -4.8% YoY) supported mainly by higher spending on transport and ICT equipment by firms in the export-oriented sectors;

III. Public consumption expanded at a moderate pace (+4.3% YoY; 3Q21: +8.1% YoY), following softer growth in supplies & services, but was supported by pandemic-related expenditure;

IV. Net exports contributed positively to overall GDP (+0.2ppt; 3Q21: -3.1ppt) amid higher exports (+13.3% YoY; 3Q21: +5.1% YoY) and imports growth (+14.6% YoY; 3Q21: +11.7% YoY).

On the supply side, all sectors excluding mining and construction registered a rebound:

I. The agriculture sector rebounded by +2.8% YoY (3Q21: -1.9% YoY), mainly from higher palm oil output (+4.8% YoY; 3Q21: -11.1% YoY) as palm oil yields improved after experiencing higher rainfall in early 2021.

Forestry & logging (+4.1% YoY; 3Q21: +3.1% YoY) and aquaculture (+3.5% YoY; 3Q21: -4.0% YoY) also rose, offsetting weaker rubber production (-18.8% YoY; 3Q21: +0.4% YoY);

II. The mining sector (-0.9% YoY; 3Q21: -3.6% YoY) remained affected by maintenance works. Crude petroleum registered a smaller contraction (-6.5% YoY; 3Q21: -8.0% YoY) while natural gas production improved (+3.9% YoY; 3Q21: +2.1% YoY);

III. The manufacturing sector rebounded strongly (+9.1% YoY; 3Q21: -0.8% YoY), driven by improvement across most industries, particularly E&E, and consumer industries. This includes electronic components, communication equipment & consumer electronics (+17.7% YoY; 3Q21: +8.2% YoY), machinery & equipment (+15.7% YoY; 3Q21: +5.2% YoY) and food processing (+12.1% YoY; 3Q21: +9.1% YoY), among others;

IV. The construction sector posted another quarter of contraction, albeit at a slower rate (-12.2% YoY; 3Q21: -20.6% YoY), following slower decline in civil engineering (-18.8% YoY; 3Q21: -36.1% YoY); residential (-24.3% YoY; 3Q21: -27.3% YoY); non-residential (-11.9% YoY; 3Q21: -13.3% YoY) and continued growth in specialised construction activities (+9.0% YOY; 3Q21: +8.9% YoY);

V. Broad-based improvement was seen in the services sector (+3.2% YoY; 3Q21: -4.9% YoY) following the economic reopening. Higher year-end holiday spending and reopening of interstate borders have led to a turnaround in retail trade (+2.1% YoY; 3Q21: -7.3% YoY) and accommodation (+48.4% YoY; 3Q21: -52.0% YoY). Increased mobility also supported business, finance and insurance activities.

Current account (CA) surplus widened to RM15.2bn or 3.7% of GNI (3Q21: RM11.6bn or 3.2% of GNI) owing to bigger surplus in goods account (RM51.8bn; 3Q21: RM41.2bn) following robust demand for manufactured and commodity exports. This offset deficits in services account (-RM15.5bn; 3Q21: -RM15.2bn), primary income (-RM19.7bn; 3Q21: -RM11.3bn) and secondary income account (-RM1.4bn; 3Q21: -RM3.1bn). Wider primary income deficit was attributed to higher investment income accrued to foreign investors.

HLIB’S VIEW

We expect the positive growth momentum to continue for the rest of the year as economic activity continues to normalise. Despite headwinds from supply chain disruptions and raw material shortages on manufacturing production, the sector is still expected to support GDP growth alongside continued recovery in services sector amid improvement in labour market and possible reopening of international travel without quarantine in March 2022. While continued virus prevalence still clouds the outlook, acceleration in booster vaccinations and healthcare capacities maintaining at manageable levels should offer some reprieve. We maintain our 2022 GDP forecast at +5.5% YoY.

While 4Q21 GDP performance was in line with our estimate, we note that the rebound in private consumption and gross fixed capital formation was still relatively modest despite the re-opening of economic activity, year-end festivities and improvement in labour market conditions. In addition, the rapid spike in Covid-19 infection post-Chinese New Year festival could lead to some dampening effect on private consumption in the near-term. Inflation is expected to be modest this year (2022f: 2.0% YoY; 2021: 2.5% YoY), however there continues to be upside risk to price pressures from supply-related disruptions. With the gradual pace of economic recovery and modest inflation prospects, for now, we maintain our expectation for BNM to increase OPR by 25bps in 4Q22 once the domestic economy is on a stronger footing.

Source: Hong Leong Investment Bank Research - 14 Feb 2022