This article first appeared in The Edge Malaysia Weekly on May 10, 2021 - May 16, 2021

CHINA, Singapore, South Korea, Taiwan, Hong Kong and Vietnam are among the countries that have reported positive first quarter gross domestic product (GDP) readings in recent weeks. Unlike some of its regional peers, which may see growth possibly inching back to pre-pandemic levels, Malaysia is expected to see year-on-year GDP growth return to positive territory only when the second quarter reading is announced on Aug 13.

Malaysia — which surprised on the upside a year ago when it reported a 0.7% y-o-y GDP growth for the first quarter of 2020 (1Q2020) despite Covid-19 causing a sea of red elsewhere — is expected to report its fourth consecutive negative quarterly y-o-y GDP reading when Bank Negara Malaysia and the Department of Statistics Malaysia release the data for the first quarter of 2021 (1Q2021) this Tuesday (May 11).

Attention will be on the central bank’s reading of the economy and the impact of the Movement Control Order (MCO) 3.0 on the recovery in the second quarter, for which consensus expects to see a strong double-digit rebound owing to a low base effect. A single-digit growth in the second quarter could have a significant impact on full-year headline numbers, especially if growth in the second half comes in slower than expected. At the time of writing, the government had yet to provide its gauge of the cost of MCO 3.0 to the economy.

For now, Julia Goh, senior economist at UOB Bank Malaysia, expects the impact of MCO 3.0 on the economy “to be similar to or smaller than that of MCO 2.0 with more targeted lockdowns”. MCO 2.0 cost the economy RM300 million a day, much smaller than the RM2.4 billion a day guided by the government for MCO 1.0 last year.

Goh expects a small contraction of only 0.5% y-o-y for 1Q despite the implementation of MCO 2.0 between Jan 13 and March 4 when Covid-19 cases saw a resurgence. Rather than headline y-o-y numbers, she says seasonally adjusted quarter-on-quarter growth “is probably more telling of the state of recovery”.

“There are two economic engines running, the manufacturing and export-related sectors against the broad services sector,” Goh says, noting that manufacturing and exports have rebounded thanks to recovering global demand while recovery is uneven for the services sector. “Selected areas are doing better, driven by digital innovations as well as the release of pent-up demand, buffered by higher savings.”

In a note dated May 7, she said “a robust recovery in manufacturing and external trade activities alongside ongoing policy support are seen as key factors mitigating the impact of stricter containment measures and aiding the recovery last quarter”.

Economists at the Malaysian Rating Corp Bhd (MARC) are not as sanguine. “Though record-breaking in 1Q2021, export growth had not been sufficient to pull the economy out of the crisis in this quarter,” they said in a statement dated May 6, noting that the streak of quarterly y-o-y GDP declines would be “the longest consecutive quarters of negative growth in Malaysia since the Asian Financial Crisis of 1998”. MARC expects the economy to contract 1.6% y-o-y in 1Q2021, an improvement from -3.4% in 4Q2020, mainly owing to a low base effect.

RHB Research’s senior economist Ahmad Nazmi Idrus, on the other hand, expects a 2.6% y-o-y contraction in GDP for 1Q2021 but followed by a strong 18.1% y-o-y growth in 2Q2021, with the effects of a low base “in full swing” given the 17.1% contraction recorded in 2Q2020.

“1Q2021 will paint a weaker path of private consumption on a y-o-y basis as a result of MCO 2.0. However, we believe the offset will come from better growth in other components of the GDP,” he wrote in a note dated May 6.

His estimates are consistent with median estimates of -2.6% for 1Q2021 and 18.2% for 2Q2021, according to Bloomberg data (February survey) at the time of writing. Median estimates of 4.3% for 3Q2021 and 4.9% for 4Q2021 point to a full-year GDP growth of 6.15% — within the government’s official growth forecast of between 6% and 7.5% this year after a 5.6% contraction in 2020.

UOB’s Goh is projecting a 5% GDP growth for the full year, below the median consensus forecast of 5.5% GDP growth for 2021, according to Bloomberg data at the time of writing.

It remains to be seen how these forecasts will change following the release of 1Q2021 GDP data, taking into consideration the impact of MCO 3.0 in six districts in Selangor from May 6 to 17 and from May 7 to 20 for the whole of Kuala Lumpur, three districts in Johor (Johor Baru, Kulai and Kota Tinggi), three districts in Perak (Taiping, Larut Matang and Selama) and 14 mukims and districts in Besut, Terengganu.

At an online briefing on May 4, Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC), says the six districts under MCO 3.0 in Selangor (Hulu Langat, Petaling, Gombak, Klang, Kuala Langat and Sepang), where Ramadan bazaars are no longer allowed to operate, account for close to 90% of the state’s GDP. Coupled with Kuala Lumpur, the MCO 3.0-affected areas in the Klang Valley alone account for easily 36% of the country’s GDP.

“So the scarring effect will continue [with MCO 3.0]. The low base effect that we hoped to see in the second quarter may be somewhat [more] tempered than originally thought due to MCO 3.0,” said Lee. “The chances of our upside scenario estimate of a double-digit GDP growth of 11.2% in 2Q2021 can materialise if the less restrictive MCO 3.0 does not go beyond one month.”

He is still hopeful of seeing a double-digit GDP growth of 11% in 2Q2021 if the current fourth wave of Covid-19 infections can be flattened quickly but reckons that 2Q2021 GDP growth could come in at only 8% y-o-y despite the low base under his “low” scenario if consumer and business sentiment are hit, even though almost all economic sectors are allowed to operate under MCO 3.0.

For the full year, Lee reckons that Malaysia’s GDP growth could be as low as 4% y-o-y should the pace of vaccinations be a lot slower than what is necessary to attain herd immunity by year-end, especially if Covid-19 cases continue to rise and discretionary spending turns cautious again on the back of a slower-than-expected economic and labour market recovery. He reckons that 6% GDP growth is possible if the country’s vaccination drive is successful and the hoped-for spurt in pent-up consumer demand for goods and services materialises.

“The reopening of international borders [via travel bubbles] and a full lifting of the interstate travel ban will contribute to a more robust and broad-based recovery in the services sector in the second half of this year when the low base effect wears off,” he says.

As at May 6, a total of 1.68 million doses of vaccines had been administered, with 1.03 million receiving their first dose and 651,072 completing two doses. Meanwhile, a total of 9.89 million people had registered for vaccines, or 40.8% of the population aged 18 and above. Only Putrajaya is fully registered while Selangor, Kuala Lumpur and Sarawak have more than 50% of the population registered. The slowest to register are Sabah (16.3%), Kelantan (26.9%) and Terengganu (32.8%), a concern given the recent rise in infections.

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