● GDP growth improved sharply in 3Q20 (-2.7% YoY; 2Q20: - 17.1%),beatingexpectations(consensus: -4.0%; KIBB: -4.6%), albeit remaining in contraction fortwo consecutive quarters

• The economy recovered from a record lowGDPcontraction of 17.1% in 2Q20 and the deepest YoY decline recorded among its regional peers.
• The improved economic condition was underpinned by the large fiscal stimulus and the implementation of the Recovery Movement Control Order (RMCO) beginning 10th June, during which most economic activities, including interstate travel, were allowed to resume.
• Growth rebounded sharply on a QoQ basis (21.2%; 2Q20: - 15.9%) and seasonally adjusted QoQ basis (18.2%; 2Q20: - 16.5%).

● Broad-based improvement, led by a recovery in domestic demand

• Domestic demand (-3.3%; 2Q20: -18.7%): contraction narrowed as the sizable fiscal stimulus and the cumulative 125 basis points overnight policy rate (OPR) reduction managed to cushion the negative impact of rising income instability amid higher unemployment rate.
  • Private spending (-3.6%; 2Q20: -20.5%): fell at a sharply slower pace due to smaller growth contraction of both private investment (-9.3%; 2Q20: -26.4%) and consumption (-2.1%; 2Q20: -18.5%), reflecting the pentup demand after months of lockdown. The recovery in private spending was reflective of the improved MIER Business Conditions Index (86.3; 2Q20: 61.0).
  • Public spending (-1.6%; 2Q20: -10.6%): fell at a slower pace, supported by a smaller drop in public investment (-18.6%; 2Q20: -38.7%) as government and agencies resumed vital projects. Meanwhile, public consumption growth further expanded (6.9%; 2Q20: 2.3%) due to increased government spending and emoluments.
• Net exports (21.9%; 2Q20: -38.6%): spiked to a four-quarter high as the rate of decline in imports (-6.3%) outpaced exports' contraction (-4.7%).
  • Exports (-4.7%; 2Q20: -21.7%): declined at a softer pace, supported by the manufactured exports (6.8%; 2Q20: -12.6%) which turned positive thanks largely to a rebound in Electrical and Electronics (E&E) shipments (16.0%; 2Q20: -9.5%) and higher demand from the US,China, and Singapore. Similarly, commodities exports registered a smaller contraction (-7.2%; 2Q20: -26.4%) on higher commodity prices.
  • Imports (-7.8%; 2Q20: -19.7%): contraction eased in line with the smaller decline in gross imports (-6.3%; 2Q20: -15.1%), attributed to a lessened drop in intermediate imports and a turnaround in consumption imports.

● A broad improvement across most sectors, chiefly led by a recovery in the manufacturing sector

• Services (-4.0%; 2Q20: -16.2%): growth contraction eased sharply but a tad above our projection (-4.4%), primarily supported by a marked improvement in the wholesale and retail trade sub-sector following the Sales and Services Tax (SST) exemptions on motor vehicles and higher demand for necessities. It was also underscored by a rebound in the finance sub-sector amid the relatively bullish capital market, and higher growth in the information & communication sub-sector. Nonetheless, non-essential retail goods, recreational and tourism activities remained subdued, weighing on key sub-sectors such as food &beverage, accommodation, and transport & storage.
• Manufacturing (3.3%; 2Q20: -18.3%): It was the biggest surprise as we had projected it to contract by -2.2%. The growth turnaround was boosted by a broad-based improvement across major manufacturing clusters, attributable to backlogs of orders in the E&E sector, government stimulus measures and strong demand for rubber and healthrelated products.
• Mining (-6.8%; 2Q20: -20.0%): contraction eased, beating our expectation (-8.4%) on improved oil & natural gas production and output in other mining segments. This was mainly due to a sharp recovery in external demand and a resumption of production activity after the MCO period.
• Construction (-12.4%; 2Q20: -44.5%): registered a smaller decline, outpacing our expectation (-20.4%), driven by a resumption in activity across all sub-sectors associated with the government’s mega transportation and affordable housing projects. The construction sector is expected to improve progressively in the 4Q20 and 2021 as the government plans to reimplement mega infrastructure projects’ and on the impact of economic stimulus.
• Agriculture (-0.7%; 2Q20: 1.0%): down marginally due to a weak oil palm sub-sector amid labour shortages. In contrast, we had estimated a positive growth of 1.2%. The weaker growth was partially offset by a recovery in the aquaculture, livestock and other agriculture sub-sectors as demand gradually improved.

● GDP contractionto ease further in the 4Q20, but at a slower pace comparedto our initial expectation, amid the resurgence of COVID-19 cases

• The third wave of COVID-19 is expected to weigh on near-term economic growth prospects, mainly due to the reinstatement of travel restrictions under the CMCO phase. Nonetheless, we expect this would not be as severe as during the MCOperiod in the 2Q20, given that most businesses, essential and non-essential, are allowed to continue operation under strict SOPs.
  • The services sector, specifically the tourism-related industry, would continue to be affected by the domestic interstate travel restrictions and international border closures.
  • The manufacturing sector is expected to endure demand and supply chain disruption due to the tightened movement restriction to contain the outbreak.
  • Monsoon season is expected to weigh on the agriculture sub-sector. However, it would be partially supported by higher CPO output and prices.
• On the external front, the US-China trade jitters would continue to weigh on global trade as the market awaits more clarity on Biden’s trade policy approach.
• Against the aforementioned circumstances,we revise downward our4Q20growth forecast to -1.7%from the previous -1.1%. This would bring the 2020 GDP growth forecast to settle at -5.1% (2019: 4.3%) compared to MoF’s -4.5% forecast. An expected global growth recovery and the impact of the large fiscal stimulus on domestic economy would result in a projected growth rebound of 6.1% in 2021 (MoF: 6.5% - 7.5%).

● BNM may cut OPR in January 2021 to bolster growth

• BNM sees the impact of the current CMCO as less severe than the MCO in 2Q20 and previous CMCO due to positive trends among leading indicators such as google mobility (retail, recreation, grocery), physical debit card spending and online spending. BNM expects the OPR reductions this year will continue to support the economy.
• Despite the central bank’s optimism, we remain cautious as the economy begins to suffer from another major surge of COVID-19 infections and the containment measures implemented in 4Q20. Therefore, we maintain a 50% probability of a 25 bps rate cut at the next Monetary Policy Committee meeting in January.We believe that BNM still has room to lean towards further monetary easing to further support the economy

Source: Kenanga Research - 16 Nov 2020