Malaysia's economy had its worst performance in 3Q2021 since the first Movement Control Order (MCO) in 2Q2020 with a sharp decline of 4.5% year-on-year (y-o-y) after the double-digit growth of 16.1% in 2Q2021. The contraction highlights the economic cost of a strict and prolonged lockdown, which was announced in mid-May and extended until early September. We estimate potential daily losses of at least RM300 million in output level during the lockdown.

On a quarter-on-quarter (q-o-q) seasonally adjusted basis, it appears that the economy is undergoing a W-shaped recovery, but we believe that the trough will be over by end-2021. Overall, as of the first three quarters of 2021, the economy grew by 3.0% compared to the drop of -6.4% during the first three quarters of 2020.

With the 3Q2021 real gross domestic product (GDP) performance coming in below our expectations, we have revised our GDP growth estimate for 2021 lower to 3.3% from 3.9% previously. Our downward revision assumes no strict nationwide lockdown for the rest of the year while all states move to Phase 4 of the National Recovery Plan (NRP) in the coming weeks.

With the gradual resumption of economic activity underway in tandem with the rapid vaccination progress, we expect a rebound in 4Q2021. A revival in consumer confidence amid pent-up demand would translate into stronger private spending. The Malaysian Institute of Economic Research's (MIER) Consumer Sentiment Index (CSI) reading in 3Q2021, which has surpassed the 100-point threshold for the first time since 3Q2018 on higher job confidence, supports such optimism. The labour market is improving at a moderate pace, as evidenced by the easing of unemployment and a higher labour force participation rate.

Hopes for a complete lifting of pandemic restrictions in the coming months have also boosted business sentiment. The Malaysia manufacturing Purchasing Manager's Index (PMI) rose to 52.2 in October 2021, the strongest expansion since April 2021. Nevertheless, sustained supply chain disruptions and the rising cost of materials are likely to constrain the strong growth for some time. Meanwhile, sturdy commodity prices and robust demand for electrical and electronic (E&E) products would boost exports.

The outlook in 4Q2021 and beyond, however, remains subject to uncertainties surrounding crisis response. As far as pharmaceutical intervention measures are concerned, we posit that the government will tilt its policy response from being aimed at addressing vaccine hesitancy towards booster shot hesitancy among the rakyat. This will, in other words, shift the spotlight away from those still unvaccinated (14 November 2021: 21.6%). The government may be assertive in its booster shot campaign in the coming months following the procurement of vaccines via the National Trust Fund to RM6 billion. Such a scenario may influence Malaysia's growth trajectory in the months ahead, delaying the green shoots of recovery.

Notwithstanding 3Q2021's contraction, we believe that a rebound in 4Q2021 will likely result in a higher output level than in 4Q2019. To reiterate, we have revised our real GDP growth estimate for 2021 downwards to 3.3% (from 3.9%) sans lockdown. We also estimate the headline inflation and unemployment rate to be at 2.4% and 4.6% on average in 2021.

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