Slash and Cut
Malaysia’s central bank slashed its GDP forecasts in half
• While its Q2 GDP came above market expectations at 16.1% yoy, Malaysia’s economic prospects have become so impacted by the ongoing Covid-19 resurgence fight that the central bank has essentially cut its full-year 2021 growth forecast in half, from 6.0-7.5% before to now 3.0-4.0%.
• To us, the severe slashing of growth outlook may be a prelude to a potential cut in the policy rate when the BNM meets next on Sep 9. Even as it pointed out a gradual recovery to come in Q4 and growth acceleration into next year, the bodily blows that the economy is suffering through now, as reflected in the new downbeat forecast, necessitates a response in the form of easing.
• Having kept the OPR unchanged in July, there is always the risk of BNM assuming the holding stance once again, of course. If the virus situation takes a fortunate turn, such that the long-afflicted and economically crucial Klang Valley can reopen in the next few weeks, BNM might be comforted enough of the recovery pace ahead. Meanwhile, if the political situation becomes even trickier after the scheduled no confidence vote on Sep 7, the need for an OPR hold to anchor market stability cannot be dismissed as well.
While it lasted
We knew that base effect provided by Q2 2020’s deep slump of -17.2% yoy would easily deliver Malaysia a symbolic boost of double-digit growth in Q2 this year on a yoy basis. We also felt that the strength in exports may have been under-appreciated by the market consensus, and hence we had pencilled in a forecast of 15.7%yoy, compared to the 14.1% that market median had in mind. Still, we were pleasantly surprised by the actual data of 16.1% yoy, which came above what we expected.
At a time when the country has been afflicted by prolonged pandemic resurgence, protracted restrictions and, not to mention, precarious politics, the GDP beat could be a form of solace just weeks ahead of Malaysia’s 64th birthday.
Looking into the details, the recovery in private consumption during the period is notable, at 11.6% yoy growth and adding a chunky 6.6 percentage points (ppt) to headline growth. Given the lack of mobility restrictions at least at the start of Q2, this is in line with the recovery in labour market at that time, which together with EPF withdrawals and cash handouts, would have bolstered household spending.
Meanwhile, investment activities would have followed a similar pre-resurgence uptick in sentiment, as well. The category rebounded by 16.5% yoy in Q2, compared to 3.3% yoy shrinkage in the previous quarter. Notably, it also marked the first time that investments actually grew on an annualized basis since late 2018.
As alluded to above, the ‘hero’ of the expansion during the quarter was really the exports sector, which grew 37.4% yoy and contributed nearly 23ppt to headline growth. Netting out the imports effect, the trade sector still contributed a sizable 1.76ppt to headline growth in Q2, compared to just 0.05ppt in the previous quarter.
The “change in stocks” expenditure component of GDP tells a slightly mixed picture, however. On paper, the segment that tells us how much inventories build-up is contributing to the overall GDP growth shows a straightforward uptick, adding a significant 2.93ppt to headline growth.
However, having such a high inventory build-up during the period could well reflect how businesses were caught blindsided by the turn of events, ordering supplies because of good demand at the start of the quarter, only for the pandemic to take a turn for the worse soon after. Indeed, going forward, the high level of inventories may presage heavy drawdowns in the coming quarters and present net drag on the overall growth.
Overall, as encouraging as the numbers for the headline and most of the segments were, they do not tell us much about what the ongoing situation is, given the big shift of events since then. The pandemic resurgence appears to remain a big problem even as we step into the second half of Q3. Despite more than two months of lockdowns in one form or another, the country continues to break record-highs in terms of the incremental daily cases, with yesterday’s 21,668 print being a case in point. While the fortunate thing is that the vast majority of cases are either asymptomatic or do not result in serious health threats, the sore reality that restriction orders may have to continue for a while more because of the inherent transmissivity of the virus has and looks likely to continue to weigh on the economy.
Indeed, given the protracted nature of the resurgence, we are downgrading our Q3 growth forecast to -2.3% yoy compared to -0.8% before. On a sequential basis, that marks an expectation of a contraction of 1.5% in seasonally adjusted terms. Given that Q2 sequential growth was already -2.0%, if our expectation proves to be right, it will also mean that Malaysia would have registered a recession – as defined by two consecutive quarters of negative growth – by Q3. Overall, even with the beat in Q2 GDP, our full-year GDP forecast now stands at 3.6% yoy, compared to 4.0% before.
The lurking threat of the pandemic is apparent when we consider how BNM has revised down its 2021 growth forecast significantly. From a lofty 6.0-7.5% before, the central bank now sees growth coming in at 3.0-4.0%, essentially downshifting its outlook by half. To be sure, as BNM noted today in its press conference, growth is expected to through in Q3 and start to show recovery in Q4, with a potential for acceleration in 2o22. However as the central bank’s governor acknowledged, the near-term outlook is “highly dependent on Covid risks and there remains significant uncertainty to growth outlook.”
Taking the various moving parts into account, we continue to see a better- than-even chance of BNM cutting its OPR benchmark by 25bps when the MPC meets next on Sep 9. While it did keep its rate unchanged in July despite the challenging situation even then, we argue that the economic conditions have not improved enough to warrant a longer wait-and-see stance.
Even if growth might start to come back by Q4 as it envisions, the protracted lockdown that the country has been experiencing has hurt Q3 growth badly enough to necessitate some form of easing. Already, even as she noted that the record low benchmark rate has continued to provide stimulus, the governor also pointed out that it has the policy space to respond if necessary.
To be sure, the weeks ahead remain a crucial period that might shift the outlook considerably. On the plus side, the rapid pace of vaccinations across the country offers hope that the pandemic curve might start to be flattened.
Already, with Malaysia delivering as many as half a million shots per day on average, nearly 30% of the population has become fully inoculated. Any reopening will be especially crucial for the Klang Valley region which contributes 40% of the GDP.
Less fortunately, however, there is a less positive risk scenario to our call for a rate cut by the BNM on Sep 9. It has to do with a event that is supposed to take place just two days before. PM Muhyiddin Yassin has scheduled a confidence vote in the parliament on Sep 7, even if the vote might take place before that due to urging by the opposition and others. Given how fluid the political situation has been and how the vote and its aftermath might unsettle the relative nonchalant market reactions to the often-dramatic development thus far, there is some possibility that BNM might opt to keep the OPR unchanged as an anchor of stability at that time.