Substantially lower than forecasts – Malaysia’s Real Gross Domestic Product (GDP) during 2Q20 slumped -17.1% y-o-y (vs 1Q20) resulted from lockdown imposed by the government due to COVID-19 pandemic. The result is substantially below our in-house and consensus expectation, and even worse than 4Q98:-11.2% y-o-y during Asian Financial Crisis. Moreover, on quarterly seasonally adjust, 2Q20 GDP tumbled -16.5% (vs 1Q20:-2.0%). 2Q20’s GDP was deteriorated by massive contractions across both production and expenditure sides as almost all sectors were closed and limited their businesses operations during MCO period. For the 1H20, GDP tumbled -8.3% y-o-y as compared to +4.7% y-o-y during 1H19.

Construction heavily affected by MCO; Agriculture rebounded amid improved production – Construction sector registered massive contraction during 2Q20, slumbering -44.5% y-o-y as compared to -7.9% y-o-y during 1Q20. A sharp contraction was dented by decline in all sub-segments activities mainly Civil engineering (-59.4% y-o-y vs 1Q20:-5.1% y-o-y) and followed by Residential buildings (-39.2% y-o-y vs 1Q20:-8.1% y-o-y), Non-residential buildings (-36.8% y-o-y vs 1Q20:-11.6% y-o-y) and Specialised construction (-29.8% y-o-y vs 1Q20:-9.0% y-o-y). On the same note, Mining & quarrying extended its negative trajectory for four consecutive quarters since 3Q19 to -20.0% y-o-y (vs1Q20:-2.0% y-o-y) in view of massive declines in Natural gas (-18.7% y-o-y vs 1Q20:+0.1% y-o-y), Crude & condensate (-21.5% y-o-y vs 1Q20:-5.2% y-o-y) as well as Other mining & quarrying & supporting services (-20.2% vs 1Q20:-2.7% y-o-y). However, Agriculture sector managed to register positive growth amid pandemic situation, improving +1.0% y-o-y during 2Q20 from -8.0% y-o-y during 1Q20, thanks to higher fresh fruit bunches production which led to rebound of Oil-palm sub-sector to +7.2% y-o-y (vs 1Q20: - 1.4% y-o-y). Moreover, Agriculture also buoyed by growths in Other agriculture (fruits & vegetables) (+4.5% y-o-y) and Livestock (poultry) (+1.3% y-o-y).

Manufacturing shrank drastically; while Services impacted by social distancing measures – Both Manufacturing and Services sectors turned to the red, diminishing -18.3% y-o-y and -16.2% y-o-y during 2Q20 as compared to +1.5% y-o-y and +3.1% y-o-y respectively in previous quarter. Manufacturing sector was deteriorated by Non-metallic mineral products, basic metal & fabricated metal products (-40.2% y-o-y) Petroleum, chemical rubber & plastic products (-13.3% y-o-y), Transport equipment, other manufacturing & repair (-30.7% y-o-y) as well as E&E & optical products (-8.8% y-o-y) which offset growth in Vegetables & animal oils & fats (+9.2% y-o-y vs 1Q20:-3.1% y-o-y). Meanwhile, Services sector was dented by declines in Wholesale & retail trade (-23.3% y-o-y), Transportation & storage (-44.8%), Food & beverages & accommodation (-40.9% y-o-y). However, Information & communication rose (+4.9% y-o-y) led by telecommunication and computer & information services in view of practicing of new norms (i.e. work from home).

Disappointing domestic demand – Private final consumption turned to the red, -18.5% in 2Q20 (vs 1Q20:+6.7% y-o-y) following contractions in Transport, Restaurant & hotels, as well as Recreation, services & culture due to fewer customer footfalls and occupancy rate. However, Food & non-alcoholic beverages coupled with Communication registered positive growth, as being classified as “essential” sectors during lockdown period. However, Public final consumption remained its positive growth, growing +2.3% y-o-y during this period from +5.0% y-o-y in last quarter. Besides, Gross fixed capital formation (GFCF) extended its decline to -28.9% y-o-y in 2Q20 from -4.6% y-o-y in 1Q20 following slides in Structure (-41.2% y-o-y), Machinery & equipment (-11.1% y-o-y) as well as Other assets (-10.2% y-o-y).

Narrowing net export – Export and Import contracted to -21.7% y-o-y (vs 1Q20: -7.1% y-o-y) and - 19.7% y-o-y (vs 1Q20: -2.5% y-o-y) respectively, dragged by weaker manufactured and mining exports, while imports fell due to continuous decline in intermediate and consumption imports. As such, trade surplus tumbled further (-38.6%) as net exports narrowed to -2.0% y-o-y during 2Q20 (vs 1Q19: -4.5% yo-y).

Foreseeing better 2H20 but downside risk persists – Looking ahead, we expect GDP growth in 2H20 to be better than 1H20 spurred by improved in sub-sectors growth as almost all industries were gradually opened and allowed to operate with specific standard operating procedure (SOP). Moreover, some economic indicators have showed key improvements such as Wholesale & retail trade index, Industrial production index, Gross exports as well as Manufacturing PMI. Nevertheless, we expect GDP for the next quarter to remain negative but in a modest contraction as businesses need to operate under some restrictions thus halting the overall sectors growths. In view of worse-than-expected 2Q20 GDP, we expect full year 2020 GDP growth to widen its negative trajectory to -5.1% y-o-y (from initial estimate of -2.0% yo-y previously) in view of rising concern on new waves of COVID-19 pandemic as well as uncertainty on COVID-19 vaccine availability. Overall, we foresee the external factors could pose headwinds to the nation’s GDP especially with the prevailing US-China trade war on top of prolonged COVID-19 pandemic outbreak.

Source: JF Apex Securities Research - 17 Aug 2020