• The Slightest GDP Growth Contraction Since Pandemic Started in 2020
• On a monthly basis, real GDP growth contracted by 3.5% yoy in January and 3.6% in February, before rebounding strongly to 6.0% in March.
• Despite the ample space to ease monetary policy, but we believe BNM will likely maintain its OPR at 1.75% throughout 2021
• Current account surplus narrowed to RM12.3bn in 1Q21 (3.4% of GNI) from RM18.6bn in 4Q20 (5.0% of GNI).

Smaller decline in real GDP growth as domestic demand improved in 1Q21

Malaysia’s real GDP growth continued to decline by 0.5% yoy in 1Q21, but improved to the slightest contraction since 1Q20 (-3.4% yoy in 4Q20). Based on the monthly GDP estimates, real GDP growth turned around from a decline of -3.55% yoy in January to February period to a positive growth of 6.0% in March, partly reflecting the low base effect from the corresponding period of last year. Nevertheless, the imposition of the second Movement Control Order (MCO 2.0) since January 2021, with restrictions on inter-state travel, weighed on domestic demand during the quarter. However, the smaller decline was supported by stronger exports performance in 1Q21. On a quarterly seasonally adjusted basis, real GDP growth rose by 2.7% in 1Q21 from a contraction of 1.5% in 4Q20.

Growth in domestic demand contracted by 1.0% yoy in 1Q21, albeit smaller decline than -4.5% in 4Q20, due to a slighter decline in private consumption as well as positive growth in private investment. Growth in private consumption declined by 1.5% yoy in 1Q21 (-3.5% in 4Q20), due to restrictions on mobility from re-imposition of MCO during the quarter, which dampened household spending. However, the decline in physical spending was partly mitigated by online spending during the quarter. The stimulus measures, including the cash assistance, EPF i-Sinar withdrawals, the Targeted Repayment Assistance (TRA) and lower passenger car sales tax also supported growth in private consumption. Growth in public consumption rose by 5.9% yoy in 1Q21 (2.4% in 4Q20), supported by higher spending in supplies and services.

Growth in total investment contracted by 3.3% yoy in 1Q21, an improvement from a sharp decline of -11.8% in 4Q20, where private investment posted a positive turnaround of 1.3% yoy in 1Q21 (-6.6% yoy in 4Q20), supported by continued capital spending in existing projects, particularly in the services and manufacturing sectors. Growth in public investment declined by 18.6% yoy in 1Q21 (-20.4% in 4Q20), due to lower spending on fixed assets by the general government.

On the external front, Malaysia’s real exports of goods and services rebounded to 11.9% yoy in 1Q21 (-2.1% in 1Q20), supported by continued improvement in manufactured exports, particularly for E&E products. Growth in real imports of goods and services rose for the first time by 13.0% yoy in 1Q21 after contracted by eighth consecutive quarter (-3.3% 4Q20). Due to the sharper increase in imports relative to exports, the contribution from net exports to GDP growth was flat in 1Q21 (+0.6ppt in 4Q20).

Manufacturing and Agriculture Sector Expanded in 1Q21

On the supply side, growth in the services sector contracted at a slower rate of 2.3% yoy in 1Q21 (-4.8% in 4Q20), supported by growth in the finance & insurance and information and communication subsectors, but remained in negative territory for the fourth consecutive quarter, impacted by weakness in tourism activity amid continued closure of international borders and restrictions on inter-state travel. The mobility restrictions and SOPs also weighed on domestic demand, especially in wholesale and retail trade sub-sector. Growth in the construction sector declined by 10.4% yoy in 1Q21 (-13.9% in 4Q20), with lower activity in the residential, non-residential and civil engineering subsectors, but supported by construction works in some commercial projects and continued implementation of small-scale projects. Growth in mining sector declined for the seventh straight quarter by 5.0% yoy in 1Q21, albeit smaller contraction than -10.4% in 4Q20, supported by slower negative growth in crude oil and expansion in natural gas production.

In contrast, growth in the manufacturing sector registered a positive growth for the third straight quarter by 6.6% yoy in 1Q21, faster pace than 3.0% in 4Q20. During the quarter, higher production of E&E products and continued recovery in the consumer-, primary- and construction related clusters supported growth. Growth in agriculture sector posted its first positive growth at 0.4% yoy in 1Q21 (-1.0% in 4Q20), due to expansion in livestock, forestry & logging and other agriculture subsectors.

Maintaining Our Real GDP Growth Forecast at 6.0% for 2021

With last year 2Q20’s low base effect expected to be felt, where economic activity contracted by -28.6% yoy in April 2020, followed by -19.5% in May and -3.2% in June, we expect real GDP growth to rebound by about 10% and 15% estimated for 2Q21, and remained in positive territory for 2H21, as impact from imposition of MCO 2.0 and MCO 3.0 will likely be less significant compared to the MCO 1.0. As highlighted by BNM, most economic sectors are allowed to continue and operate during MCO 3.0, similar with MCO 2.0. As actual data indicates impact due to imposition of MCO 2.0 was much less significant compared to the MCO 1.0 in 2020, the economic losses from the current MCO, will likely be less than RM0.3bn a day, where we estimated that the drag on GDP growth will be roughly 0.5 percentage points (for MCO 3.0 from 12 May to 7 June 2021).

We are maintaining our full year growth forecast of 6.0% in 2021, at the lower end of the official projection of 6.0% to 7.5% (+4.3% in 2019). Our estimates show that real GDP growth will likely register a positive growth of 7.3% in 1H21 before moderating to 4.7% in 2H21. The softness in labour market condition will likely be manageable, as most businesses are allowed to operate under current SOPs. We expect real GDP growth to be supported by better external demand from expansion in global growth, ongoing fiscal stimulus and monetary policy measures, as well as expected rollout of vaccines to lift business and consumer sentiments. The implementation of stimulus measures since 2020 and in early 2021 have helped to reduce the severity of economic burden of lockdowns on households and businesses. With the country’s strong exposure to the global growth as well as electronics (ie, semiconductor industry), the anticipated improvement in global economic development and semiconductor demand will likely support Malaysia’s exports in 2021. 

BNM anticipates inflation to average higher by between 2.5% to 4.0% in 2021 (-1.2% in 2020), due to a lower base and temporary spike in 2Q21 from an anticipated rise in global oil prices as well as the diminishing base effect. On monetary policy, the decision on OPR direction will depend on new economic data and information, which may be related to the duration of enforcement of MCO 3.0 from containment measures. Despite the ample space to ease monetary policy, but we believe BNM will likely maintain its OPR at 1.75% throughout 2021.

Current account surplus narrowed to RM12.3bn in 1Q21  

As for the balance of payments (BOP), Malaysia’s current account surplus narrowed to RM12.3bn in 1Q21 (3.4% of GNI) from RM18.6bn in 4Q20 (5.0% of GNI). The current account surplus was supported by the surplus in the goods accounts of RM36.6bn in 1Q21 from RM42.6bn in 4Q20. This was reflected in Malaysia’s external trade performance during the quarter, where the trade surplus remained high at RM58.6bn in 1Q21 from RM59.9bn in 4Q20.

Meanwhile, the services account registered a wider deficit of RM14.9bn in 1Q21 from a deficit of RM14bn due to higher payment for technical and trade related services and sustained weakness in travel receipts amid continued restrictions on international travel. Malaysia’s financial account registered a turned around net inflow of RM16bn in 1Q21 compared to a net outflow of RM10.2bn in 4Q20, due to higher inflow in other investment. Due to the narrower current account surplus, the overall balance of payments recorded a slightly wider deficit of RM3.6bn in 1Q21 (-RM2.7bn in 4Q20). 

Malaysia’s international reserves rose to USD108.6bn as at end-1Q21 from USD107.6bn as at end-4Q20. As at 30 April 2021, international reserves stood at USD110.8bn, sufficient to finance 8.7 months of retained imports, and is 1.1 times the short-term external debt. Going forward, we anticipate the current account balance to remain in a substantial surplus underpinned by healthy economic fundamentals, the diversified nature of Malaysia’s exports and a gradual pickup in economic activity.

Source: Affin Hwang Research - 12 May 2021