Expect double-digit contraction in 2Q GDP

Economists expect GDP to fall into negative territory in 2Q20 due to full impact of Covid-19-driven MCO


WITH the global economic slowdown aggravated by the Covid-19 pandemic, Malaysia’s economy could have contracted by as much as 11% in the second quarter of 2020 (2Q20), said economists.

This is mainly due to the 47-day Movement Control Order (MCO) that began in March, forcing most businesses to shut down and thus bringing the economy to a near halt in an effort to stop the spread of the deadly coronavirus.

Bank Negara Malaysia (BNM) is scheduled to announce the 2Q20 GDP figures tomorrow.

Malaysia narrowly escaped a contraction in 1Q20 with a 0.7% expansion, its weakest GDP print since 3Q09 when the economy shrank by 1.1%. However, the central bank said in May it expects a GDP contraction in 2Q20, a sentiment shared by economists amid the pandemic.

Malaysia’s neighbours also fell into negative territory in 2Q20, with Singapore reporting a -13.2% drop, Indonesia shrinking -5.3% and the Philippines plunging -16.5%.

MIDF Amanah Investment Bank Bhd economist Mazlina Abdul Rahman said a GDP contraction in 2Q20 is inevitable as the country experienced a full month of the MCO followed by Conditional MCO phases. During this period, most non-essential economic activities were put on hold while most countries around the world were also in lockdown, further impacting trade flows.

“We are looking at a -7.2% year-on-year (YoY) fall in GDP for 2Q20,” Mazlina told The Malaysian Reserve (TMR) in an email reply.

“On the expenditure side, all components are expected to contract in 2Q20 except government consumption on the back of stimulus packages.”

Of the total RM295 billion worth of stimulus packages, just RM45 billion was via fiscal injection.

Private consumption, the biggest contributor to GDP, is likely to fall as consumers spent less when homebound under the MCO. Retrenchments in affected sectors also hurt overall expenditure, Mazlina added.

Negative growth is expected across all key sectors including services, partially due to international border closures and weak travel sentiment.

Exports, the Industrial Production Index and retail sales fell -14.3% YoY, -18% YoY and -18.9% YoY (1Q20: 1.1% YoY, 0.6% YoY and 2.1% YoY) respectively in 2Q20.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid is projecting a 7% decline in the 2Q20 GDP print, due to a sharp moderation in consumer spending, as well as a contraction in investments and net exports.

“We believe the economy may have hit the trough in the June quarter. Thereafter, we can expect economic activities to start to pick up the pace.

“This was quite evident from the recent data points in June and business sentiments as indicated by the Purchasing Managers’ Index hovering around expansionary mode,” he told TMR.

AmBank Group chief economist and head of research Dr Anthony Dass expects 2Q20 GDP to hover at around -10% to -11% as the economy was severely dragged by the health crisis during the period.

“Should the GDP contract to this level, it will be the worst since the 1997/1998 Asian financial crisis,” he told TMR.

Economists surveyed by Bloomberg have a consensus forecast of -10.7% for 2Q20.

UOB Global Economics & Markets Research forecasts real GDP to decline 18.5% in 2Q20, lower than its initial estimate of -12%.

“The sharper contraction in 2Q20 is attributed to weakness in the overall services index which fell 21.5%; construction work done that declined 45% in 2Q20; manufacturing output fell 18.1%; and mining production that declined 19.6%,” it wrote in a note yesterday.

Moody’s Analytics projects Malaysia’s GDP to register at -6% for 2Q20, it said in its Asia-Pacific Economic Preview report.

Assuming the reopening of the economy can be sustained, a smaller contraction can be expected in 3Q20 and perhaps, positive YoY growth in 4Q20, Bank Islam’s Mohd Afzanizam said.

“However, this is premised on the ability of the country to control and contain the virus spread. Thus far, the rise in Covid-19 is very localised and the stricter MCO was very targeted.

“In that sense, the reopening of the economy narratives are very much intact. Additionally, the positive developments over vaccines appear to be forthcoming.”

AmBank’s Dass said downside risks remain high, driven by fears of more waves of the deadly virus, coupled with ongoing external issues and domestic challenges.

“Nonetheless, on the base case, there is room for the economy to bottom out and pick up gradually in 3Q20 onwards, provided that external shocks are well contained, commodity prices are fairly stable and the electrical and electronics sector lends support.”

BNM said in May it’s keeping its full-year GDP forecast of between -2% and 0.5%, although a revised estimate will be released in the second half of 2020 following greater clarity in data and trading outlook.

Bank Islam’s Mohd Afzanizam is expecting GDP to come in at -1.5% for 2020, while UOB forecasts a -3.5% print.