• In 2Q2021, we envisage a sharp turnaround in Malaysia's real GDP growth on a year-on-year (y-o-y) basis to 13.2%, compared with -0.5% recorded in 1Q2021. Such promising performance will likely be Malaysia's highest quarterly growth ever recorded. The double-digit growth primarily reflects a favourable base effect as the economy contracted 17.2% in the same period a year ago due to a strict nationwide lockdown.
•  Our projected strong y-o-y quarterly growth suggests that the 2Q2021 performance cannot offset last year's contraction, still falling short in steering the Malaysian economy to pre-pandemic output levels. As the economy continues to reel from intermittent lockdowns, we posit that it will be a long and winding road ahead towards recovery.
• Private consumption will remain the key driver of growth. However, more stringent mobility restrictions could have impacted growth towards the end of 2Q2021, such as the closure of non-essential services implemented since mid-May. Google Mobility data show footfalls to retail and recreation have dropped by more than 50% since then compared with pre-pandemic levels, which is only marginally smaller than the declines seen during the first nationwide lockdown. Additionally, the ominous labour market should see consumer sentiment deteriorating, as reflected by the fall in the Consumer Sentiment Index (CSI) reported by the Malaysian Institute of Economic Research (MIER) to 64.3 in 2Q2021.
• Growth in investments will likely decelerate due to political instability and the government's reactive handling of the pandemic. The manufacturing sector, which has been a significant contributor towards economic recovery, seems to have lost some momentum due to the 60% capacity restriction imposed, among the more stringent mobility restrictions. Industrial production growth has eased to 1.4% y-o-y in June 2021 after a record high of 50.1% in April 2021.
• Exports will support growth given the sturdy commodity prices and robust economic recovery in Malaysia's major trading partners in 2Q2021 (China: 7.9%; Singapore: 14.3%; US: 12.5%). Malaysia's exports of goods increased 13.9% y-o-y in June 2021, the fourth consecutive month of double-digit growth, but slowing from the peak of 44.8% recorded in April 2021.
• On a quarter-on-quarter (q-o-q) basis, real GDP growth is expected to decline further to -4.4% (1Q2021: -4.1%), which would translate into a double-dip contraction which may likely spill over to the next quarter. There were signs of further weakness in activity data, particularly in May and June, when the resurgence of COVID-19 cases led to more stringent mobility restrictions. The country's score on Oxford's COVID-19 Government Response Tracker's stringency index rose to over 80 in mid-May from 53 in mid-April.
  
• We believe that Malaysia's near-term growth outlook strongly hinges on the stringency of mobility restrictions and the pace of inoculation moving forward. Further delays of social amelioration would exacerbate long-term economic scarring. Favourable base effects will dissipate in the coming quarters, so it is apt to view growth prospects in a much longer horizon than we currently do.

Contacts:
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my;
Lee Si Xin, +603-2717 2942/ sixin@marc.com.my.