In line with market expectation – Malaysia posted the second quarter of 2021 real Gross Domestic Product (GDP) growth of 16.1% yoy (vs 1Q21: -0.5% yoy) which is in line with our in house as well as the market expectation. Nevertheless, on a seasonally adjusted qoq figure, 2Q21’s GDP contracted 2% (vs 1Q21: +2.7%). The growth was largely attributed by the low base in the second quarter of 2020 when GDP recorded -17.2% growth, whereby the first lockdown was imposed by the government due to the Covid-19 pandemic.

Double-digit growth on all sectors of supply side…… Service sector increased by 13.4% yoy (1Q21: -2.3%) mainly supported by Wholesale & retail subsector which posted +21% growth, Finance & insurance subsector: +23.3% and Transport & Storage subsector: +37.2%. Meanwhile, the Manufacturing sector further expanded to +26.6% this quarter from 1Q21: +6.6% underpinned by all industries except for vegetables, animal oils & fats and food processing. Petroleum, chemical, rubber and plastic products soared 28% yoy, Electric, electronic and optical products recorded +26.3% yoy while Transport equipment, other manufacturing & repair increased by 41.6% yoy. On the same note, Construction sector jumped 40.3% yoy from -10.4% in 1Q21 contributed by all sub-sectors whereby Specialised construction activities soared +58.1% and Civil Engineering surged +50%. Meanwhile, Non-residential buildings and residential buildings improved +34.8% (1Q2021: -5.9%) and +16.3% (1Q2021: -4.7%). This was mainly due to more construction activities were allowed to be conducted in 2Q21. Mining and quarrying increased by +13.9% yoy (1Q2021: -5%). The better performance was mainly driven by Natural gas, +21.9% (1Q2021: +0.3%) and Crude oil & condensate +4.9%(1Q2021: -11.5%).

…… with the exception of Agriculture sector which recorded a decline in this quarter. Agriculture sector contracted 1.5% yoy in second quarter of 2021 as compared to Q1 2021, +0.2% yoy. After the seasonally adjusted qoq, Agriculture grew 5% qoq (1Q2021: -0.6%). The decline in Agriculture sector was mainly due to the double-digit contraction in Oil palm subsector, -10.9% (1Q2021: -3.5%). We believe this was caused by decrease of output pursuant to labour shortage amid the virus lockdown which restricted foreign workers entering Malaysia. Nevertheless, the contraction was eased by Other agriculture and Livestock subsectors which registered +6% yoy (1Q2021: +5.7%) and +6.3% (1Q2021: +3.5%) respectively.

Rebound on domestic demand Y-o-Y but marginally decline on Q-o-Q basis. Private consumption expenditure increased by 11.6% yoy (1Q2021: -1.5% yoy) thanks to the higher consumption on Transport, Food & non-alcoholic beverages and Communication compared to 2Q2020. After a seasonally adjusted qoq, Private consumption expenditure fell 10.7% (1Q2021: +4.7%). Government consumption expenditure expanded its growth to +9% yoy (1Q2021: 5.9% yoy) which was mainly contributed by higher spending on supplies and services. After seasonally adjusted qoq, it registered a decline of 1.1% qoq (1Q2021: +6.7% qoq). Meanwhile, Gross fixed capital formation (GFCF) recorded a double-digit growth of 16.5% on yoy basis (1Q2021: -3.3% yoy). But on the qoq seasonally adjusted, GFCF dropped 7.5% (1Q2021: -0.02%). The improvement of GFCF as compared to last year was contributed by both Private and Public sectors. Private sector accounted for 83% to the total GFCF, +17.4% yoy (1Q2021: +1.3%) while Public sector contributed 17% to the total GFCF recorded a growth of 12% (1Q2021: -18.6%). The better yoy performance in GFCF was in line with the recovery of Construction sector (+20.2% yoy), growth of Machinery & equipment (+15.1% yoy) and other assets (+4.4% yoy).

Strong growths of Export and Import underpinned by the recovery global economic activities. Exports achieved growth 37.4% yoy (1Q2021: +11.9%), after qoq seasonally adjusted basis, Exports grew moderately at +5.0% (1Q2021: +9.5%) which was mainly contributed by strong demand of E&E and rubber products. Imports recorded a +37.6% yoy (1Q2021: +13%), whilst on a qoq seasonally adjusted, it recorded a slower growth of +2.1% (1Q2021: +15.4%).

Challenging economic recovery in 2H2021 with elevated Covid-19 confirmed cases and continued movement restriction. Despite the encouraging GDP posted in second quarter due to the low-base effect, we believe the economic recovery in second half will be weaker than expected and there will be inconsistent on the pace of recovery in different sectors. The continued high confirmed cases and death rate as well as prolonged movement control imposed by the government have dented the growth momentum of 2H2021 as the households and businesses have turned more cautious on their spending behaviour. Hence, we revise down our national real GDP growth to +4.1% yoy (from previous +5.1% yoy), which is higher than BNM’s revised forecast of 3-4% by slashing our estimates on private consumption and net export. Nevertheless, with the fast roll out of national vaccination program, most of the states in Malaysia are expected to achieve phase 4 of the national recovery plan by December 2021, leading to meaningful recovery for most of the economic activities and industries.

Source: JF Apex Securities Research - 16 Aug 2021