Malaysia: Preview 4Q20 GDP, reverse to a deeper decline

Recovery Stalls in 4Q20 Amid Resurgence in COVID-19 Infections

Based on the newly released industrial production and services statistics, Malaysia’s economy is poised to reverse course and fall into a deeper decline of 3.8% y/y in 4Q20 (from -2.7% in 3Q20, Bloomberg consensus: -3.1%). This will bring full-year real GDP contraction to 5.7% in 2020, based on our estimate.

All key sectors (except manufacturing) are expected to post larger declines following the reinstatement of the Conditional Movement Control Order (CMCO) to contain the spread of COVID-19 infections during the quarter.

1. Overall services sector is projected to decline further (UOB’s estimate for 4Q20: -5.0% y/y; 3Q20: -4.0%), except for information& communication, finance & insurance, and government services sub-segment. The latter three services sub-industries will be boosted by increased work-from-home arrangements, virtual learning, online shopping activities, and continued government policy support.

Investment income from the country’s largest initial public offering (IPO) in three years last October is also seen as one of the key contributors to stronger growth in the finance & insurance sub-segment in 4Q20. On the flip side, tourism-related industries such as accommodation, transport, and food & beverages continue to lag.

2. Manufacturing activity is expected to improve at a slower pace by 3.0% (3Q20: +3.3%) amid rising demand and disruption in sourcing imported inputs. Robust export demand also supported manufacturing activity in 4Q20. Key sub-sectors that will underpin overall manufacturing performance include electrical & electronics products, rubber & plastic products, basic pharmaceutical products, paper & paper products, and transport equipment.

3. The contraction in the agriculture sector is expected to deepen to 2.0% (from -0.6% in 3Q20), weighed down by falling production of crude palm oil, rubber, and aquaculture products. Bad weather and monsoon seasons are some of the main factors.

4. Construction sector continues to face hurdles from stricter SOPs, shortage of foreign workers, and slow commencement of government’s development projects. We foresee the sector to register a bigger contraction of 16.5% last quarter (3Q20: -12.4%), with residential, non-residential, and civil engineering work done falling further.

5. Mining & quarrying sector is expected to decline at a double-digit pace of 10.7% (3Q20: -6.8%) dragged down by both crude oil and natural gas production. Ongoing maintenance work and compliance to global oil output cuts tempered the performance of the sector last quarter.

On the aggregate demand front, the continuation of government spending and positive net trade contribution is expected to support overall GDP in 4Q20 as private consumption and total investments continue to take a backseat amid inventory withdrawal.

Although the MIER business sentiment improved to 115.4 points in 4Q20 (3Q20: 86.3 points), consumer confidence weakened to 85.2 points (3Q20: 91.5 points) and the employment outlook remains dim due to the lingering pandemic. The unemployment rate inched up to an average of 4.8% in 4Q20 from 4.7% in 3Q20.

Growth Trajectory to Improve From 2Q21 Onwards

2021 kicked off with more domestic challenges as tighter containment measures were introduced and a state of emergency was announced as part of wider efforts to contain the COVID-19 pandemic. The negative impact is moderated by allowing more economic sectors to open subject to strict operating measures.

The growth trajectory is expected to improve from 2Q21 onwards, aided by a low base effect and a further improvement in the global economy. The vaccination program that will begin in early March alongside supportive fiscal and monetary measures will also help lift sentiment.

The government has on 18 January unveiled additional measures worth RM15 billion under the PERMAI assistance package to sustain the economic recovery. This package will be financed through government funds reallocated from the initial RM322.5 billion budget expenditure for 2021.

Key initiatives include acceleration of cash handouts, advance payments from EPF’s i-Sinar program, wage subsidy support of RM1.5 billion, SME grants of RM800 million, electricity bill discounts and rebates, and extended tax relief measures.

Besides, Bank Negara Malaysia (BNM) on last Friday (5 February) announced that the central bank will increase the allocation for the Targeted Relief and Recovery Facility by another RM2 billion to a total of RM4 billion that will be available until 31 December 2021 or until it is fully utilitised, whichever is earlier.

BNM also set up an RM200 million Disaster Relief Facility 2021 to alleviate the financial burden and assist in the resumption of business operations of SMEs affected by recent floods.

The National COVID-19 Immunisation Programme will be implemented through three phases over a 12-month timespan. The first phase is expected to kick start in early March, involving half a million vaccines for frontline workers. The second phase is for vulnerable groups involving those aged 60 and above and those with infectious and non-communicable diseases. The third phase will be to all 17 million Malaysians, especially those who are working.

Hence, we maintain our 2021 GDP growth target at 5.0% (official forecast: 6.5%-7.5%). Actual 4Q20 and full-year 2020 GDP data will be released on Thursday (11 February).