● GDP growth rebounded in 2Q21 (16.1% YoY; 1Q21: - 0.5%), its first expansion since 1Q20, and beating house and market expectations (KIBB: 11.7%; Consensus: 14.1%)

• Seasonally adjusted QoQ (-2.0%; 1Q21: 2.7%): fell back into contraction due to the reinstatement of the Movement Control Order (MCO 3.0) from May 12 and subsequent Full Movement Control Order (FMCO) from Jun 1.
   
• The higher YoY growth was due to an improvement in almost all production sectors, driven by the services and manufacturing sectors, as well as a large expansion in private consumption and investment. However, the strong growth was also mainly attributed to the low base of 2Q20, and considering the QoQ contraction, it is apparent that domestic activities have been significantly impacted by the MCO restrictions.
   
• - Meanwhile, Bank Negara Malaysia (BNM) has revised its 2021 GDP forecast to 3.0% – 4.0% (Previously: 6.0% – 7.5%), highlighting concerns on the impact of the prolonged COVID-19 containment measures.
   
• BNM expects the uncertainty on progression of the pandemic and the containment measures to likely affect nearterm growth trajectory. Achieving herd-immunity via vaccination by end-October to control the spread of the Delta variant, faster transition into Phase 4 of the National Recovery Plan (NRP) by end of 3Q21, and higher pent-up demand, would be a welcoming signal towards faster growth recovery.

● Broad-based expansion driven by a surge in domestic demand, particularly in private consumption and private investment

• Domestic demand (12.3%; 1Q21: -1.0%): sharpest growth since 4Q15, mainly supported by private sector expenditure.
  ▪ Private spending (13.0%; 1Q21: -0.9%): climbed to its highest level since 4Q15, led by a rebound in private consumption (11.6%; 1Q21: -1.5%) with an expansion across both necessity and discretionary spending. Growth was also driven by a further rise in private investment (17.4%; 1Q21: 1.3%), on higher capital spending especially in the services and manufacturing sectors. Private spending represented 9.7 percentage points (ppts) to overall GDP growth (1Q21: -0.7 ppts).
  • However, on a QoQ basis private spending plummeted (-8.9%; 1Q21: 5.6%), weighed by the FMCO restrictions. This in line with a persistently high unemployment rate of 4.8% (1Q21: 4.7%) and a sharp decline in the MIER Consumer Sentiments Index (64.3; 1Q21: 98.9), which reached a 5-quarter low.
     
• Public spending (9.7%: 1Q21: -1.5%): rebounded to an over 5-year high, driven by soaring growth in public investment (12.0%; 1Q21: -18.6%) on higher General Government capital spending, and continued growth in public consumption (9.0%; 1Q21: 5.9%) amid greater government spending with the introduction of the PEMERKASA+ fiscal package.
   
• Net exports (34.3%; 1Q21: 0.8%): surged to its highest level since 1Q18 and contributed 1.8 ppts to GDP growth (1Q21: 0.0 ppts), as exports growth (3.5%) slightly outpaced imports growth (3.4%) on a QoQ basis. ▪ Exports (37.4%; 1Q21: 11.9%): robust growth was driven by a sustained rise in electrical and electronic (E&E) exports (32.2%; 1Q21: 27.9%) and a recovery in exports of commodities (30.4%; 1Q21: -11.0%), amid stronger external demand, particularly from the US, Singapore, and China. ▪ Imports (37.6%; 1Q21: 13.0%): surge in growth was led by a continued rise in retained imports (33.8%; 1Q21: 8.6%), especially in the intermediate goods segment (46.0%; 1Q21: 4.6%).

● Strong growth across almost all sectors, except agriculture, led by the services and manufacturing sectors

• Services (13.4%; 1Q21: -2.3%): rose to its highest level since 4Q15, contributing 7.7 ppts to GDP growth (1Q21: -1.3 ppts), driven by a recovery in consumer activities early in the quarter, but was partly reversed by the reintroduction of MCO measures. Growth was also bolstered by a continued improvement in the information and communication subsector, amid rising e-commerce demand and e-payments, along with growth in the finance and insurance subsector.
   
• Manufacturing (26.6%; 1Q21: 6.6%): soared to a record high level (5.9 ppts to GDP growth), as exportoriented industries benefitted from strong external demand, especially for E&E products, amid the technology upcycle and ongoing global economic recovery. Nevertheless, manufacturing growth was still impacted by the MCO, which restricted operations to only essential sectors.
   
• Construction (40.3%; 1Q21: -10.4%): rebounded to register positive growth for the first time since 4Q19, supported by the continued construction of large-scale infrastructure projects and several small-scale projects under the 2021 budget, PEMERKASA and PEMERKASA+ economic packages. However, on a QoQ basis the construction sector continued to decline (-8.8%; 1Q21: -3.6%) as it was heavily impacted by MCO restrictions.
   
• Mining (13.9%; 1Q21: -5.0%): recorded its first expansion since 2Q19 and was attributable to an improvement in both crude oil and natural gas production, on the back of strong external demand, which outweighed the impact of some temporary facility closures.
   
• Agriculture (-1.5%; 1Q21: 0.2%): returned to contraction, primarily due to a larger decline in palm oil production, amid labour shortages, and a decline in the forestry and logging subsector. This overshadowed growth in the rubber, fisheries, livestock, and other agriculture subsectors.

● We revise down our 2021 GDP forecast range to 3.5 – 4.0%, from 4.0 – 5.0% previously (2020: -5.6%), and our 3Q21 GDP forecast to between -2.0% – 0.5% from 6.4%

• This is to reflect the impact of the prolonged Phase 1 restrictions, amid a resurgence in Malaysia’s COVID-19 cases, which will likely destabilise the upward momentum of domestic demand in 2H21 and would particularly weigh on 3Q21 growth. As such, we project 2H21 growth to register between 0.0% – 1.0% (previous: 4.0% – 6.0%), compared to 7.1% in 1H21 (2H20: -3.1%).
   
• Nevertheless, we are optimistic that Malaysia’s high vaccination rates may advance more states to promptly reach Phase 4 full reopening, thereby leading to an improvement in growth by 4Q21. As of Aug 14, 44.5% of Malaysia’s adults have been fully vaccinated and the government expects complete vaccination of the adult population by end of October. Considering that daily symptomatic hospital admissions has replaced daily number of COVID-19 cases as a threshold indicator, we can expect most of the country to soon advance into the more relaxed Phase 2 and Phase 3 of the NRP, providing moderate upside in the medium-term.
   
• Furthermore, the economy is still expected to be supported by export-driven activities on strong external demand, with major trading partners continuing to chart solid economic recoveries, global oil prices remaining elevated, and the technology upcycle ongoing. Additionally, public investment will likely continue to rise due to several ongoing mega infrastructure projects (e.g. MRT 2, Pan-Borneo Highway, JENDELA). However, the resurgence of global COVID-19 cases poses some concern about a potential slowdown in global growth, which may also hinder the pace of Malaysia’s economic recovery.
   
• With that said, our outlook is still dependent on several risk factors and partly echoes BNM’s near-term growth trajectory expectations, these include the persistent rise in COVID-19 infections locally and abroad, potential delay in relaxing the COVID-19 restrictions, effectiveness of vaccines against the COVID-19 variants, possible downgrade of Malaysia’s sovereign credit ratings, and the unstable domestic political situation, which risks developing into policy uncertainty.
   
• Given the lower base, along with the expectation that the COVID-19 situation would further stabilise, and that the economy would gradually improve, we are revising our 2022 GDP forecast to 5.5% – 6.0%, from 5.3% previously.

● BNM will likely keep the policy rate unchaged for the rest of 2021

• We expect BNM to retain the overnight policy rate (OPR) at 1.75% for the rest of the year, despite the elevated level of domestic COVID-19 cases. This is due to Malaysia’s recovery outlook remaining intact, given high vaccination rates and an eventual exit from lockdown measures.
   
• Furthermore, BNM officials unveiled no clue during the 2Q21 GDP briefing that there would be any adjustment to the OPR any time soon. Nonetheless, amid pandemic uncertainty, the central bank indicated that monetary policy would continue to be determined by developments on the COVID-19 situation as well as the economy. On the latter, we reckon BNM’s focus would be to scour through jobs, debt and inflation data for any signs that could lead to further deterioration of economic growth.
   
• As the government faces limited fiscal space and possible challenges towards raising the debt ceiling, restricting the prospect of further stimulus packages, there is a possibility that BNM may consider tapping additional monetary policy tools to support the economy. Furthermore, if the COVID-19 condition deteriorates and delays economic reopening, we believe BNM has enough space to lower the OPR accordingly

Source: Kenanga Research - 16 Aug 2021