Second GDP contraction expected in 3Q21

Malaysia’s economy lost traction in the quarter due to the reintroduction of a nationwide lockdown and weak investment sentiment 


A SECOND straight quarter-on-quarter GDP contraction is expected for the third quarter (3Q21) that will signify a technical recession, UOB Global Economics & Markets Research stated in a report ahead of GDP announcement by Bank Negara Malaysia today. 

UOB noted that based on July to September economic indicators, Malaysia’s economy lost traction in the quarter due to the reintroduction of a nationwide lockdown and weak investment sentiment. 

“We project real GDP to fall by -4.3% year-on-year (YoY) or seasonally adjusted -1.6% quarter-on-quarter (QoQ) last quarter (Bloomberg consensus: -1.9% YoY or -0.6% QoQ; 2Q21: +16.1% YoY or -2% QoQ). 

“This marks the second straight QoQ GDP contraction on a seasonally adjusted basis, signifying a technical recession,” UOB noted. 

The bank stated the contraction is unlikely to extend into the 4Q21 as containment measures were lifted and most economic and social activities have been allowed to reopen this quarter. 

It further noted that all sectors are expected to see contraction in the 3Q, led by the construction sector, while support for the manufacturing sector would come from exemptions to allow operation of essential sectors. 

The services sector will be dragged down by weaker tourism-related activities. 

The agriculture sector is projected to record a larger decline in output as a result of labour shortages, while the mining and quarrying sector will be weighed by sluggish crude oil output.

The bank further said on the aggregate demand side, government spending and further stock replenishment activities are anticipated to partially cushion the weakness in other aggregate components amid an expected negative net trade contribution to overall GDP in 3Q21. 

While private consumption is expected to weaken in the quarter amid high unemployment. 

UOB expects total investment to contract on the back of lower capital spending by both private and public corporations amid cautious business sentiment. 

Malaysian Ratings Corp Bhd (MARC), meanwhile, projects Malaysia 3Q to post a contraction of 3.7% YoY due to depressed domestic demand on the nationwide lockdown and concerns about the pandemic, offsetting robust export performance. 

“The brunt of lockdown on the economy is evident in the steep decline in retail and recreation footfall to the lowest level since the first Movement Control Order imposed in March-May 2020, based on data compiled by Google Mobility,” said MARC in a report yesterday. 

Consequently, MARC expects retail sales to suffer a contraction of 8.1% and 7.5% YoY in July and August. 

The Manufacturing Purchasing Managers Index reading was below 50 throughout the 3Q, indicating a deterioration in conditions for the industrial sector. 

It added that exports will remain in positive territory. 

“The monthly export data in August and September 2021 recorded double-digit growth of 18.4% and 24.7% YoY. A rally in the prices of crude oil and crude palm oil has lent some support to the export growth. 

“We expect a rebound in 4Q21 following a relaxation in the mobility restrictions as vaccination rates are approaching the requirement to achieve herd immunity,” said MARC. 

It added that pent-up demand and sustained export growth will be the main growth drivers in the 4Q21 since all states, except Kelantan and Sarawak, are now in Phase 4 of the National Recovery Plan.