Technical recession likely, but economy set to rebound in 2021

PETALING JAYA: Malaysia is expected to see another dip in economic growth in the third quarter, with a technical recession likely to extend to the final three months of the year due to the ongoing conditional movement control order (CMCO).

According to CGS-CIMB Research, the country’s gross domestic product (GDP) is projected to decline 3.5% in the three months to September. This followed a 17.1% lockdown-inflicted contraction in the second quarter, thus confirming a technical recession, which is defined by two consecutive quarters of negative growth.

The third-quarter GDP is due tomorrow. The brokerage said it would likely contract 1% in the fourth quarter due to the successive extensions in the CMCO. THIS would result in a lower full-year GDP forecast of a 5% contraction, compared with its earlier forecast of a 4.4% decline for 2020.

The economy was expected to see rebound next year, CGS-CIMB Research said.

“We maintain our expectations of a 7.5% GDP rebound in 2021, driven by supportive fiscal and monetary policy as well as an assumption of normalising economic activities and easing social distancing requirements by mid-2021, which has been bolstered by recent progress on a vaccine breakthrough,” it explained.

On its third-quarter forecast, CGS-CIMB Research said recent data suggested that the GDP likely declined.

“Bright spots were auto sales and finance, which recorded growth.” CGS-CIMB Research

The industrial production index rose 1% year-on-year (y-o-y) in September, compared with a growth of 0.3% y-o-y in August, as manufacturing built on recent gains, led by export-driven rubber products and electrical and electronics, as well as the lift in autos from sales tax exemption-driven demand.

The mining and electricity sub-indices, however, continued to fall 9.6% y-o-y and 2.1% y-o-y, respectively.

Entering the fourth quarter, CGS-CIMB Research said, services remains a weak spot with the looming CMCO effect.

“Unlike manufacturing, the services index continued to contract in the last quarter, albeit at a slower pace as precautionary social distancing and border closures impacted the hotel, transport, food and beverage, real estate and arts, entertainment and recreation sectors,” the brokerage said.

“Bright spots were auto sales and finance, which recorded growth, while the contraction in retail and wholesale trade narrowed sharply,” it added.

The drag in the construction sector moderated to -13.1% y-o-y in the third quarter (-44.9% y-o-y in the second quarter) amid a partial restart in projects under strict standard operating procedures, it noted.

“A weaker sequential recovery at the yearend may suppress improvements in labour market conditions; after the unemployment rate had fallen from a peak of 5.3% in May to 4.6% in September,” CGS-CIMB Research pointed out.