Malaysia’s 2Q20 GDP’s sharp contraction a ‘wake-up call’

Magnitude of -17.1 GDP hit and uncertain global outlook in 2H20 warrant another 25bps ‘insurance cut’ at MPC meeting on Sept 10


MALAYSIA’S worst quarterly economic contraction in more than two decades reflected the impact the Covid-19 pandemic-induced measures had on corporate Malaysia and could help temper bullish sentiment in the local stock market, according to Public Investment Bank Bhd (PublicInvest).

Market sentiment could be dampened as investors weigh the reality of the economic impact of the virus on local companies’ future earnings, said PublicInvest head of research Ching Weng Jin.

“This is a wake-up call, especially to market investors,” he told The Malaysian Reserve (TMR).

“The recovery path is going to be rocky, especially when confidence isn’t all that fantastic.”

Disposable income and cashflow will be an issue over the next couple of months, Ching added. The six-month blanket loan moratorium

is slated to end on Sept 30, as businesses should have resumed operations and job losses should cool in line with eased pandemic-containment measures.

The nation suffered a 17.1% decline in GDP for the second quarter of 2020 (2Q20), which wiped out about three years of output growth. The contraction was the worst in South-East Asia so far. Thailand is due to release its numbers this week.

Yet, the benchmark FTSE Bursa Malaysia KLCI surged almost 30% as at last Friday’s close from a low of 1,207 points on March 19.

Trading volumes have hit record highs in recent weeks, even as the pandemic crimped consumption and disrupted the global supply chain.

“The stock market has rocketed upwards since March as though nothing ever happened,” Ching said.

“The reality of a 17.1% contraction will slowly start to sink in, with investors likely to be less gung-ho going forward.”

The gains were mainly driven by investors cashing in on makers of gloves and other personal protective equipment, amid swelling pandemic-induced demand for these products.

The 2Q20 economic contraction is the worst year-on-year (YoY) drop since 4Q98 when the economy shrank 11.2% amid the Asian financial crisis, as well as the first negative GDP figure since the global financial crisis in 2009.

“The fall in 2Q20 GDP figure was not too surprising. We all knew it was going to be bad, though maybe -17.1% is a little weaker than expected,” Ching said.

Economists earlier surveyed by Bloomberg had a consensus estimate of -10.9% for the three months. On a quarter-on-quarter seasonally-adjusted basis, the economy contracted by 16.5%. This came after Malaysia posted growth of 0.7% in 1Q20.

Exports dropped 21.7% and imports fell 19.7%, reflecting supply chain disruptions due to the pandemic.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid labelled the 2Q20 decline in output “massive”, with the -17.1% GDP print being the lowest ever YoY comparison.

“Consumer spending, which is very instrumental to the Malaysian economy (comprising 61.7% of GDP in 1Q20), collapsed with an 18.5% decline during the quarter (1Q20: 6.7%). Restrictive human mobility had obviously impacted the ability for Malaysians to transact, although the proliferation of the digital economy may (have), to some degree, minimised the impact,” he told TMR.

The services and manufacturing sectors declined 16.2% and 18.3% respectively, while construction plummeted 44.5% and mining and quarrying slipped 20%. Agriculture bucked the trend with a 1% growth.

Most expenditure components declined, and all final demand components fell except for government final consumption expenditure, which grew 2.3% (1Q20: 5%) as emoluments continued increasing while spending on supplies and services fell.

To be sure, the weak numbers in 2Q20 were expected, Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus (picture) said in a virtual briefing last Friday.

Yet, key indicators such as exports and the indices of industrial production and wholesale and retail trade are already indicating a V-shaped recovery, as economic activities resumed in phases from May.

“We are likely to see a trough in 2Q20. The economy is poised for a gradual recovery in the second half of 2020 (2H20) and rebound further in 2021,” Nor Shamsiah added.

OCBC Bank economist Wellian Wiranto said the magnitude of the 2Q20 GDP hit and the still-uncertain global outlook in 2H20 would warrant another 25 basis points (bps) “insurance cut” at the next Monetary Policy Committee (MPC) meeting on Sept 10.

Slashing the Overnight Policy Rate then would also help make up for the end of the six-month blanket loan moratorium, due to expire on Sept 30.

“Given that the moratorium has been key in supporting private consumption — which would have slumped even more considerably in the 2Q20 without it — the need to ease the sudden transition back towards having to service loans once more has become even more apparent,” Wiranto wrote in a recent note.

In her virtual briefing, Nor Shamsiah said there is room for “targeted policy measures” to augment those implemented earlier, in the event of another Covid-19 outbreak.

“For example, the banks’ policy levers can be extended within this mandate. This includes our monetary policy, liquidity measures and financial measures. Likewise, the government will maintain some fiscal space to provide stimulus, and support households and businesses if the need arises.”

BNM has revised its full-year GDP forecast to between -3.5% and -5.5% for 2020, from a previous estimate of -2% to 0.5%. It expects a rebound in 2021, with economic growth to register between 5.5% and 8% on stronger domestic and external demand.

Bank Islam also adjusted its full-year GDP forecast to -4% versus -1.5% previously, with growth to return at 6.2% in 2021.

For the 3Q20 and 4Q20, the economy is estimated to contract by 3.5% and 1.8% respectively, Maybank Investment Bank Bhd chief economist Suhaimi Ilias told TMR.

He expects full-year GDP to come in at -5.4% (versus -3.3% previously) in 2020 and 5.1% in 2021.

“I believe the worst is behind us and the recovery is forthcoming. Let us continue on that path,” Nor Shamsiah said.