Better-than-expected growth– Malaysia’s Real Gross Domestic Product (GDP) for third quarter of 2020 was above streets and in-house expectation, easing its contraction to -2.7% y-o-y from -17.1% y-o-y during second quarter of 2020. Meanwhile, on a quarterly seasonally adjusted basis, 3Q20’s GDP turned to the black, +18.2% q-o-q (vs 2Q20:-16.5% q-o-q). During 3Q20, the growth was underpinned by rebound in almost all of sub-sectors from both production and expenditure sides in view of re-opening of economic activities arising from relaxation of mandatory control order (MCO). Nevertheless, as for 9M20, GDP deteriorated -6.4 y-o-y as compared to +3.9% y-o-y during 9M19.

All production sub-sectors rebounded except for Agriculture – Construction sector which was heavily affected in the previous quarter, easing its negative growth to -12.4% y-o-y in view of improved activities albeit in subdued growth; Residential buildings (-12.3% y-o-y vs 2Q20:-39.2% y-o-y), Nonresidential buildings (-16.4% y-o-y vs 2Q20:-36.8% y-o-y) and Civil engineering (-16.7% y-o-y vs 2Q20:- 59.4% y-o-y). Besides, Specialised construction turned to positive trajectory, which rose +1.8% y-o-y from -29.8% y-o-y in previous quarter. Other than that, Services sector which was the largest contributor for supply side (57%) registered a single-digit contraction of -4.0% y-o-y as compared to -16.2% y-o-y arising from better growths in Information & communication (+5.4% y-o-y) and Finance & insurance (+5.5% y-oy) which offset tourism related industries activities such as Food & beverage and accommodation (-29.5% y-o-y vs 2Q20:-40.9% y-o-y), Transportation and storage (-16.6% y-o-y vs 2Q20:-44.8% y-o-y) as well as Wholesale & retail trade (-2.5% y-o-y vs 2Q20:-23.3% y-o-y). On the same note, Mining & quarrying contracted -6.8% y-o-y vs (2Q20:-20% y-o-y), no thanks to lower production of Natural gas (-7.7 y-o-y vs 2Q20:-21.5% y-o-y), Crude & condensate (-5.4% y-o-y vs 2Q20:-21.5% y-o-y), and Other mining & quarrying and supporting services (-8.1% y-o-y vs 2Q20:-20.2% y-o-y).

Manufacturing returned to the black; lacklustre for Agriculture sector – Manufacturing sector registered positive trajectory, improving by +3.3% y-o-y (vs 2Q20:-18.3% y-o-y) underpinned by higher productions of E&E & optical components (+9.2% y-o-y), Vegetable & animal oils & fats and food processing (+7.4% y-o-y), Petroleum, chemical, rubber and plastic products (+2.3% y-o-y) as well as Transport equipment, other manufacturing and repair (+5.2% y-o-y). Contrary, Agriculture sector depleted to -0.7% y-o-y from +1.0% y-o-y in prior quarter, dented by disappointing Fishing (-10.6% y-o-y) and Rubber (-24.0% y-o-y) despite improved Oil palm (+2.6% y-o-y).

Moderate improvement on domestic demand post lockdown; higher government spending seen – Private final consumption posted single-digit contraction of -2.1% y-o-y (vs 2Q20:-18.5% y-oy). Minimal contraction recorded was underpinned by growth in expenditure of essential items such as Food & non-alcoholic beverages, Housing, water, electricity, gas and other fuels as well as Communication. However, non-essential sub-sectors like Recreation services & culture, Restaurants & hotels as well as Furnishing, household equipment and routine household maintenance were discouraging during this period. However, Public final consumption continued its growth, escalating +6.9% y-o-y (vs 2Q20:+2.9% y-oy) following higher spending on supplies and services such as stimulus and economic packages, we believe. Meanwhile, Gross fixed capital formation (GFCF) remained lackluster and maintained its double-digit contraction of -11.8 y-o-y from -28.9% y-o-y in 2Q20, attributed to decline in Structure (-12.9% y-o-y vs 2Q20:-41.2% y-o-y) and Machinery & equipment (-8.3% y-o-y vs 2Q20:-11.1% y-o-y). Moreover, Other assets extended its decline to -15.7% y-o-y (vs 2Q20:-10.2% y-o-y).

Improving net export – Both Export and Import narrowed its decline to -4.7% y-o-y and -7.8% y-o-y respectively (vs 2Q20:-21.7% y-o-y; -19.7% y-o-y) which resulted in net trade growing +21.9% y-o-y (vs - 38.6% y-o-y). Minimal contraction recorded from both export and import driven by better trade performance as factories resumed its business operations during the recovery conditional movement order (RMCO).

Downside risk is expected to persist in 4Q20 due to CMCO – For last quarter of the year, we expect GDP growth to register moderate growth following conditional movement control order (CMCO) in certain areas arising from new waves of COVID-19 cases. Although some economic activities have shown some improvements in Sept’20 (i.e. Manufacturing production, Gross Exports as well as Wholesale & retail trade), we believe re-emerging COVID-19 cases since Oct’20 on the back of uncertainty of COVID-19 vaccine availability could ease the activities, thus affecting overall economic growth. However, in view of better than expected growth in 3Q20 GDP growth, we revise our full year 2020 GDP forecast to -4.9% y-o-y (from -5.1% y-o-y previously). Overall, we foresee the external factors could pose headwinds to the nation’s GDP especially with the prevailing geo-political risks on top of prolonged COVID-19 pandemic outbreak.

Source: JF Apex Securities Research - 16 Nov 2020