Q1 GDP contraction could be narrower than expected

Research house projects 0.6% y-o-y shrinkage for M’sian economy as recovery in manufacturing, external trade offsets impact of Covid-19 containment measures

Malaysia’s economy could register a surprise narrower decline of 0.6% year-on-year (y-o-y) for first-quarter 2021 (Q1’21), compared with a 3.4% y-o-y contraction in Q4’20 despite the reimplementation of movement control order 2.0 (MCO 2.0) from Jan 13 to March 4, 2021, according to BIMB Securities Research.

“A robust recovery in manufacturing and external trade activities alongside ongoing policy support are seen as key factors mitigating the impact of stricter containment measures and aiding the recovery last quarter,” it stated in a report.

Bank Negara Malaysia will announce the first-quarter gross domestic product (GDP) number today.

The research house said the latest data, which showed industrial production index (IPI) growth of 3.9%, stronger manufacturing growth of 6.8% as well as modest contraction in mining of 4.1% and electricity at 0.1%, confirmed its views of a narrower GDP print for the quarter.

It said its projection is also supported by a slew of improving figures for Q1’21 on a yo-y basis, from a pickup in export growth of 18.2%, lower contraction of 10.5% in value of construction work done and a smaller services contraction of 3.6%.

The country saw a 1.5% improvement in volume index of wholesale & retail trade and a 13.7 point improvement in the Malaysian Institute of Economic Research’s (MIER) consumer sentiment index to 98.9 points, the highest reading in tenquarters which pointed to better consumer confidence, among others.

BIMB Securities Research noted that although Malaysia contended with a severe resurgence in Covid-19 cases that peaked in February and tighter restrictions that dampened the revival of domestic consumption, the economy benefited from a relatively strong trade position.

“Exports were supported by recovering global demand for manufactured goods and bolstered by a surge in global demand for semiconductors,” it said.

The research house acknowledged the sizeable gains in exports over the March quarter more than likely offset the softness in domestic consumption as producers benefitted from recovering global demand for manufactured goods, while the net position was bolstered by global demand for semiconductors and recovering commodity prices. However, sectoral discrepancies remain, especially for the persistent underperformers in services and onstruction.

While certain industries remained positive or improved from the previous quarter, it noted tourism-related segments – such as accommodation, food & beverage, and transport & storage – continued to be weighed down by the ongoing containment measures.

Construction activity, meanwhile, has been affected by shortage of foreign workers and slow commencement of government projects.

BIMB Securities Research stated the economy is expected to track a firmer recovery path from Q2’21 onwards due to the base effect and underpinned by sizeable fiscal measures and gradual reopening of the economy.

Although it is concerned about the spread of new strains of Covid-19 and alarming rise in the number of infections locally and abroad, the base effect and strong exports could aid this year’s second quarter growth to accelerate depending on the impact of the stimulus spending and a smooth vaccine rollout.

Overall, BIMB Securities Research opined that the 2021 growth outlook has improved for the Malaysia economy, on the back of supportive domestic policies and sound macro fundamentals, but the recovery remains uneven.

It noted the labour market picture is clearly improving but not quite back to prepandemic business-as-usual situation.

“The latest tightening of measures under MCO 3.0 and lingering uncertainties are expected to weigh on the economy in the near term but not derail the recovery.”

The research house opined that the impact of MCO 3.0 is expected to be less severe with most key economic sectors allowed to operate and measures in place to mitigate negative effects.

“The swift and sizeable economic policies as well as easy monetary conditions have been crucial in supporting the economy. These should continue together with sustained vigilance against a resurgence of infections,” it said.

BIMB Securities Research said the balance of risks has tilted to firmer growth, albeit with remaining pockets of weakness. It is maintaining its 2021 GDP growth projection of 5.1% on the back a low base effect and a strong pickup in global demand induced by Covid-19 vaccination efforts, barring an unforeseen risk of an uncontrollable Covid-19 pandemic.