Broad-Based Recovery Helps Underpin Smaller GDP Contraction In 3Q20
Leading economic indicators in Jul-Sep suggest that real GDP will recover significantly in 3Q20. We estimate GDP to remain in negative territory but narrower at -2.6% y/y (vs. -17.1% y/y in 2Q20).
1. Manufacturing activity is expected to expand by 3.2% y/y in 3Q20 (2Q20: -18.3% y/y). This follows the relaxation of COVID-19 containment measures since early May while businesses ramped up output to meet backlog of orders.
2. Agriculture sector is likely to record mild gains of 0.8% y/y in 3Q20 (2Q20: +1.0%), thanks to improved palm oil production (3Q20: +3.6% y/y; 2Q20: +7.1% y/y). The gains would be partly offset by sluggish rubber output (3Q20: -26.1% y/y; 2Q20: -22.6% y/y).
3. Services is expected to contract by a narrower -4.0% y/y in 3Q20 (2Q20: -16.2%) as gains in motor vehicle sales, information & communication, finance & insurance, and government services sub-sectors help to offset declines in the other sub-components.
4. Construction activity is expected to record further double-digit declines as reflected in construction work done numbers, which fell for the third consecutive quarter by 13.1% y/y (2Q20: -44.9% y/y). It shrank across the board, led by residential work done (3Q20: -12.0% y/y; 2Q20: -38.7% y/y), non-residential work done (3Q20: -16.0% y/y; 2Q20: -36.2% y/y), and civil engineering(3Q20: -13.6% y/y; 2Q20: -55.2% y/y).
5. Mining & quarrying sector is expected to post contraction for the fifth straight quarter following persistent declines of both crude oil (3Q20: -5.4% y/y; 2Q20: -21.2% y/y) and natural gas production (3Q20: -7.3% y/y; 2Q20: -18.3% y/y).
The drag from private consumption is expected to narrow significantly in 3Q20 after it plunged by -18.5% y/y in 2Q20, aided by government’s cash aids, withdrawal from EPF’s account 2 and reduction in employees’ contributions to EPF, blanket loan moratorium, and discount on electricity bills amid still high unemployment.
Containment Measures Soften Bounce in 4Q20, Hopeful For 2021
Although 3Q20 GDP is expected to improve, the recovery pace is likely to recede as the resurgence of infections and Conditional Movement Control Order (CMCO) in wider parts of the country are likely to weigh on sentiment and recovery pace in 4Q20.
As such, we are likely to revise down our 2020 GDP estimate of -3.5%, pending the release of actual 3Q20 GDP this Friday (13 Nov). For 2021, we expect real GDP to rebound by +5.5% (official forecast: 6.5%-7.5%).
Upside surprises could come from higher government spending amid the large expenditure outlays in Budget 2021 and wider distribution of vaccines that could give a decent lift to GDP from 2Q21 onwards amid favorable base effects.
The sizeable government spending of RM322.5bn (or 20.6% of GDP) planned in 2021 alongside tax cuts and various tax relief measures, permitted withdrawal from EPF’s account 1 for the first time in history, and lower EPF contribution rate by employees are expected to help support private consumption with multiplier effects that could lift GDP growth by 4% points next year.
Written by Julia Goh, Senior Economist, & Loke Siew Ting, Economist