Overview

● The sharper-than-expected and record high contraction in the 2Q20 GDP of the core sectors (services, manufacturing and construction) highlights risk to the growth recovery and the underlying structural weakness of the economy.

● BNM has revised its 2020 GDP forecast downward to between -5.5% and -3.5% from -2.0% and 0.5%, mainly to reflect the severity of the impact of COVID-19 pandemic.

● Given the current weaker growth trajectory and risk to growth, we have reduced our 2H20 GDP growth forecast to -3.7% (initial projection: -2.3%) and 2020 growth forecast to -5.9% (initial projection: -2.9%; 2019: 4.3%). We have also adjusted our growth projection for 2021 to 5.1% from 4.1% previously.

● Given the relatively upbeat tone by BNM on the recovery outlook, we see a higher probability that the central bank would keep the OPR unchanged at 1.75% at its September’s MPC meeting. Nevertheless, there is still room for BNM to lean towards further monetary easing should the recovery pace weaken.

● GDP growthfellsharplyin2Q20 (-17.1% YoY;1Q20:0.7%),far belowexpectations(consensus:-10.9%;KIBB:-7.5%),weighed mainly by the COVID-19 containment measures

- It was the sharpest contraction since the quarterly data was made available which starts from 1988 and by far the worst in the region on a YoY-basis. It overtook Singapore’s (- 13.2%) and the Philippines’ (-16.5%) 2Q20 GDP declines.

- Apart from reflecting the severe impact of COVID-19 pandemic and movement restriction measures, the sharperthan-expected contraction in 2Q20 suggests that the recovery remains weak since the gradual re-opening of the economy in May.

- It fell sharply on a QoQ basis (-15.9%; 1Q20: -7.0%) and recorded the steepest contraction (-16.5%; 1Q20: -2.0%) on a seasonally adjusted QoQ basis.

● Broad-basedslowdown, led by sluggishdomestic andexternal demand due to twin demand and supply shock

- Domestic demand (-18.7%; 1Q20: 3.7%): It fell sharply due to weak private spending as a result of a lower income and surge in the unemployment rate, following the nationwide lockdown under the Movement Control Order (MCO) since mid-March, further exacerbating weak consumer and business sentiments.

▪ Private spending (-20.5%; 1Q20: 4.7%): It declined sharply due to severe growth contraction of both private investment (-26.4%; 1Q20: -2.3%) and consumption (-18.5%; 1Q20: 6.7%). Thiswasin line with the MIER Business Conditions Index, whichdeteriorated to 61.0 in 2Q20 (1Q20: 83.0), reflecting the impact of measures under the MCO.

▪ Public spending (-10.6%; 1Q20: -0.6%): fell for the second straight quarter and at a faster pace weighed by a record fall in public investment (-38.7%; 1Q20:-11.3%) due to a sharp contraction in capital spending of both general government and public-linked corporations which was not spared under the MCO, contributing to delays in key government projects. Meanwhile, public consumption continued to expand (2.3%; 1Q20: 5.0%) but at a slower pace, in spite of the fiscal stimulus announced since end of February and additional measures in March and April to cushion the impact of the outbreak.

Source: Kenanga Research - 17 Aug 2020