Posted Date: August 14, 2020

The sharp downturn in real GDP in 2Q2020 (-17.1% y-o-y) has been expected, given that many economies were in lockdown and Malaysia having experienced its own Movement Control Order (MCO) between March and May. The severity of the GDP contraction even surpassed the decline in real output that Malaysia experienced in 4Q1998 during the height of the Asian Financial Crisis (AFC).

On the supply side, save for agriculture, a broad-based contraction was seen across sectors. The sharpest drop was in the construction sector (-44.5%), followed by mining and quarrying (-20.0%). The manufacturing sector fell by 18.3% due to disruptions in the global supply chain and weak demand conditions as a result of lockdowns imposed in many countries as well as the sharp deterioration in business conditions.

On the domestic demand side, public investment saw the sharpest drop (-38.7%), followed by private investment (-26.4%). Malaysia's traditional growth pillar, private consumption, fell 18.5% following movement restrictions and income losses amid weak economic conditions. Government consumption, however, registered a positive growth of 2.3%. On the international front, net exports fell 38.6%.

A recession in 2020 is a foregone conclusion. However, it is important to note that the sharp downturn in 2Q2020 was primarily due to the unprecedented impact of the stringent containment measures imposed to control the COVID-19 pandemic globally and domestically, rather than any abrupt material change in economic fundamentals. These containment measures, although resulting in significant short-term discomfort, were necessary to ensure that economic growth can be revived when the situation improves. Allowing the economy to run unimpeded could have ruptured the existing economic fabric beyond repair, preventing any smooth recovery in the future.

Malaysia is not alone in experiencing its deepest recession since the AFC. Singapore's official forecast for GDP growth is currently at -5% to -7%, Thailand's is at -8.1% and the Philippines' is at -5.5%.

The focus is now on the prospects for 2021 and beyond, that is, the economic landscape in the medium term, given that it will take time for traditional growth drivers (private consumption and investments) to return to pre-COVID-19 levels.

Malaysia's future growth trajectory hinges largely on private consumption and investments. The former had contributed an average of 71% of headline growth in the past decade. Statistics from previous recessions indicate that private consumption growth in the first year of recovery will generally come in lower than that recorded during the pre-crisis period despite benefiting from the low base factor.

In addition, consumers' reluctance to indulge in conspicuous consumption patterns similar to pre-COVID-19 levels (due to ongoing concerns regarding the pandemic and the reduction in their purchasing power) will mean that consumer spending growth may not spike as strongly as it did during the first year of the recovery compared to previous recovery periods.

Similarly, investment prospects will not be encouraging if the current estimate of a 30%-40% decline in global foreign direct investment (FDI) flows by the United Nations Conference on Trade and Development (UNCTAD) becomes a reality. This is because in the past five years, Malaysia's FDI inflows tended to move in tandem with global trends.

Notwithstanding the downbeat outlook, assuming that global lockdowns will not take place again in the near term, improvements in global trade will benefit an open economy such as Malaysia. Assuming the World Trade Organisation's (WTO) projected recovery in global merchandise trade volume in 2021 materialises (2021 forecast: between +21% and +24%), Malaysia's export performance could pick up and contribute positively to headline growth via improvements in net trade.

On balance, we expect the decline in economic activity to be less severe as domestic and external conditions slowly improve in 2H2020. However, we foresee real GDP growth to remain negative in the next two quarters. Hence, we are revising our real GDP growth forecast for 2020 to -5.5% ~ -7.0% (BNM: -3.5% ~ -5.5%). Going into 2021, we foresee the economy rebounding due to the low base effect and the decent growth in consumer spending. In addition, higher global crude oil prices will provide a boost to the economy (our average Brent forecast for 2021: USD50-USD55 per barrel). As such, we maintain our real GDP growth target at between 6.2% and 6.7% for 2021 (BNM: +5.5% ~ +8.0%).

Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my