Marginally below market expectation – Malaysia’s Real Gross Domestic Product (GDP) in the first quarter of 2021 is better than our in-house expectation but slightly behind market expectation, registering a decrease of -0.5% y-o-y as compared to -3.4% y-o-y during 4Q20. Meanwhile, for a seasonally adjusted quarterly figure, 1Q21’s GDP posted a positive growth of 2.7% q-o-q (compared to 4Q20: -1.5% q-o-q). During this period, the gradual recovery of Malaysia’s economy was on the back of more economic activities and sectors were allowed to operate during the Movement control Order (MCO) 2.0 alongside with the Conditional Movement Control Order (CMCO) and Recovery Movement Control Order (RMCO) which were less stringent than the MCO 1.0 imposed last year.

Easing of negative growths for Production sub-sectors – Service, Mining and quarrying as well as Construction. Service sector registered a smaller contraction of 2.3% YoY compared to -4.8% YoY in 4Q2020 thanks to the rebound of Wholesale and retail trade sub-sector (+1.2% YoY vs Q420 -1.4% YoY), and improvement of all segments especially Motor Vehicles, as well as the expansion of growth in Finance and Insurance and the ICT sub-sectors which registered +11.6% YoY and +6.3% YoY respectively. These were offset by the F&B and accommodation (-29.8% YoY) as well as the Transportation and storage subsectors (-16.2% YoY). On the same note, Mining and quarrying sector contracted -5.0% compared to -10.4% in 4Q20. The subsectors Natural gas production was back to the positive trajectory which registered a +0.3% YoY result (4Q20 -9.9% YoY) but offset by the Crude oil and condensate (-11.5% vs 4Q20 -12.9%) and Other mining & quarrying and supporting services (-4.2% vs 4Q20 -2.6%). Construction sector eased its negative growth by recording -10.4% as compared to 4Q20’s -13.9% in view of improved activities from 4Q20 of Residential buildings (-4.7% YoY vs 4Q20 -11%), Non residential buildings (-5.9% vs 4Q20: -6.6%) and Civil engineering (-28.8% vs 4Q20: -32.7%). Meanwhile, the specialised construction continued its expansion to +16.8% compared to 4Q20: +9.4%.

Improvement supported by the expansion of Manufacturing sector and the rebound of Agriculture sector. Manufacturing sector expanded further to +6.6% YoY as compared to +3.0% YoY in 4Q20, underpinned by E&E & optical product (+10.6% YoY), Petroleum, chemical, rubber & plastics products (+7.3% yoy) and followed by Transport equipment, other manufacturing & repair (+8.1% yoy vs +6.9% in 4Q20). Meanwhile, Agriculture sector rebounded marginally to +0.4% YoY compared with 4Q20 -1.0% thanks to the better performance in subsectors - Other agriculture (+5.7% yoy), Forestry & logging (+11.5%) and Livestock (+3.5%) backed by the increased domestic production.

Moderate showing on domestic demand underpinned by increased government spending. Government consumption expenditure increased to +5.9% yoy compared to +2.4% 4Q20. The increase, we believe, was mainly due to the higher spending on supplies and services by the stimulus package-Malaysian Economic and Rakyat's Protection Assistance Package (PERMAI) launched by government on 18 Jan 2021 valued at RM 15 billion. However, the Private consumption expenditure still recorded a negative but milder result (-1.5% yoy) as compared to 4Q21 (-3.5% yoy) was attributed to the improved performances of subsectors such as Clothing and footwear (-2.2% vs 4Q20 -8.7%), Furnishings, household equipment and routine household maintenance (-4.4% vs 4Q20 -10.5%), Recreation services and culture (-48.9% vs 4Q20 -54.1%) and Restaurants and hotels (-27.8% vs 4Q20 - 34.2%). Gross fixed capital formation (GFCF) eased its contraction by registering single-digit negative growth of -3.3% as compared to 4Q20’s -11.8%, supported by the commendable result of Machinery & equipment (+10.3% yoy) after recording a contraction for the past nine quarters.

Both Export and Import back to positive trajectory. Exports and Imports both rebounded with double-digit growths of +11.9% yoy (vs 4Q20 -2.1%) and +13% (vs 4Q20 -3.3%) respectively, mainly driven by the better growths in exports and imports of goods with the rising of global demand notably for E&E products for both export and imports. Meanwhile, the net export stood at +2.6% yoy during this period.

Downside risk to persist in 2Q21 due to MCO 3.0; vaccination programme to boost 2021 GDP – For the second quarter of 2021, we expect GDP to register moderate growth in view of re-imposition of MCO 3.0 on Klang valley on 6 May and it is expanded to the whole country starting from 12 May to 7 June which could partly halt economic activity especially those entertainment and recreational sectors during this period. Nevertheless, we still believe 2Q21 will have a positive growth of GDP in view of more economic activities are allowed and less restriction during MCO 3.0 as compared to previous MCO1.0 imposed. We reckon that economy will slowly recover and back to pre-COVID-19 level as the national vaccination programme is on track with the target of inoculating 80% of the population of Malaysia before the end of this year. Therefore, we keep our national GDP unchanged, growing by +5.1% y-o-y in 2021. However, we foresee the external factors could pose headwinds to the nation’s GDP especially with the prevailing geopolitical risks.

Source: JF Apex Securities Research - 12 May 2021