1Q20 GDP lowest in 10 years and the worst is yet to come

BNM warns the impact of MCO is expected to be even worse in 2Q20, leading to sharp contraction in the GDP


MALAYSIA’S GDP growth sank to 0.7% in the first quarter of 2020 (1Q20), the lowest in 10 years, due to pandemic containment measures with the worst yet to come as the central bank warned of a more severe impact in 2Q20.

Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus (picture) said during a virtual press conference yesterday that the economic expansion was the weakest since 3Q09 when the economy contracted -1.1%.

“The moderation (in 1Q20) reflected the impact of measures taken both globally and domestically to contain the spread of the Covid-19 pandemic. Domestically, it mainly reflected the implementation of the Movement Control Order (MCO),” she said.

The slow growth was also a sharp moderation from the 3.6% expansion recorded in 4Q19. Analyst estimates for 1Q20 GDP had ranged from as low as -4.2% to +0.8%.

Economic activities came to “almost a complete and sudden halt” with the implementation of the MCO on March 18 as the order included travel restrictions, limited operating hours and mandatory social distancing.

Agriculture contracted -8.7% in 1Q20 due to lingering weather and fertiliser-related disruption in oil palm yields, mining fell 2% on ongoing maintenance works and the gas pipeline incident in East Malaysia, and construction slipped 7.9%. The impact of containment measures is expected to be even worse in 2Q20, leading to a likely contraction in the GDP, the central bank warned.

Under the Conditional MCO (CMCO) beginning May 4, mandated health protocols and standard operating procedures (SOPs) are now more binding than the earlier assumed voluntary social distancing, while border closures will likely be enforced throughout the year.

“Given the containment measures in Malaysia and globally, we have to expect that the Malaysian economy will experience a sharp contraction in 2Q20 compared to 1Q20,” Nor Shamsiah said.

She cited Google data showing deterioration in leisure, shopping and public transport commuting from February through April 2020. Electricity generating data also plunged in April, signifying a slowdown particularly in business activity.

Regional economies including South Korea and Chinese Taipei recorded larger contractions in April exports, affirming weak external demand.

Malaysia’s exports also fell 4.7% in March versus an 11.8% increase in February, while factory output measured by the Industrial Production Index (IPI) contracted -4.9% — the biggest drop in almost 10 years.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid cautioned that an expected economic contraction in 2Q20 may even drag on to 3Q20.

“A respectable recovery can be expected, particularly in the 4Q20, if the reopening of certain sectors continues, though the government must remain mindful of a possible spike in new Covid-19 cases,” he told The Malaysian Reserve.

“I think the government should accelerate the infrastructure projects soonest possible in order to crystallise the economic multiplier effects.”

Bank Islam is keeping its estimate of -1.5% for overall GDP this year. Full-year GDP growth in 2019 came in at 4.3%, the lowest since the global financial crisis.

BNM is also maintaining its forecast for Malaysia’s full-year 2020 GDP to be between -2% and 0.5% for now, as the uncertainties posed by Covid-19 and domestic commodity issues make providing a definitive forecast range “highly challenging”.

It will release a revised forecast in the 2H20 following greater clarity in data and the outlook, particularly for Malaysia’s major trading partners.

The country’s unemployment rate will also see an “inevitable” increase going forward, likely above the earlier forecast of around 4%. It hit 3.9% in March, the highest since June 2010.

“The unemployment rate is projected to peak in 2Q20 as firms undertake drastic measures to cut costs amid longer halt in operations and weak demand,” Nor Shamsiah said.

With the CMCO, however, some degree of rehiring can be expected as economic activities resume, resulting in a gradual decline in the unemployment rate in 2H20.

Similarly, economic activity should gradually improve in 2H20 as containment measures are relaxed, alongside support from the government’s RM260 billion stimulus, progress in transport-related public infrastructure projects and a recovery in commodities supply.

“In line with the projected improvement in global growth, the Malaysian economy is expected to register a positive recovery in 2021, especially as our trading partners also resume economic activities,” Nor Shamsiah said.

Headline inflation, which came in at 0.9% in 1Q20 and fell 0.2% in March on lower fuel costs, is likely to turn negative in 2020 on expected substantially lower global oil prices.

But the risk of deflation is “limited” as the impact of Covid-19 on prices across sectors is not broad-based, given that demand is high for certain items such as food and low for others.

OCBC Bank (M) Bhd economist Wellian Wiranto said the 0.7% growth was a surprise against the bank’s median expectation of -1% to -4% due to concerns on consumption growth.

Investment activities, which shrank 2.3% in 1Q20, would leave more impact in 2Q20, Wiranto wrote in a note yesterday.

He said the economy may contract as much as -6% in 2Q20 before registering some gains in 2H20, which would enable it to post a growth of -0.5% for the year.

The central bank may cut the Overnight Policy Rate (OPR) further to 1.5% from 2% currently, if there is any indication that growth momentum would suffer more despite the easing of the MCO, Wiranto added. The OPR has already been cut by 100 basis points so far this year.

BNM also said the Special Relief Facility (SRF), which was made available on March 6 to aid small and medium enterprises (SMEs) impacted by Covid-19, has been upsized to RM10 billion.

This comes as the initial RM5 billion allocation has been fully utilised and will benefit 9,000 SMEs across Malaysia and preserve more than 200,000 jobs.

As at May 4, the participating financial institutions have approved over 20,000 applications amounting to about RM10 billion with a nearly 90% approval rate.

“There are another RM5 billion worth of applications approved by financial institutions that are beyond the SRF’s initial RM5 billion allocation.

“So, what we will do is we will honour the amounts already approved by the participating financial institutions as at May 4, when the RM5 billion limit has been met.

“And this would mean that our SRF allocation would be increased to RM10 billion,” Nor Shamsiah said.

Following the release of 1Q20 economic data, the FTSE Bursa Malaysia KLCI closed 17.2 points or 1.25% higher at 1,397.13 yesterday. Volumes traded at a historic high of 9.6 billion shares.