SINGAPORE: The second-quarter GDP figures released on Aug 14 shows pain all around for the Malaysian economy during the period.
Declining by 17.1 per cent year-on-year (y-o-y), the slump is the sharpest that Malaysia has ever seen and came much worse than what we and the market had expected.
This performance is even worse than the 11.2 per cent decline that Malaysia went through in the fourth quarter of 1998 at the height of the Asian Financial Crisis.
In quarter-on-quarter seasonally adjusted terms, a decline of 11.4 per cent after a 2 per cent slowdown in the first quarter confirms that the Malaysian economy is in a recession.
Details show hits on multiple sectors. Crucially, private consumption slumped by 18.5 per cent y-o-y, as consumers pulled back despite cash handouts and a blanket loans moratorium.
This is a sharp difference from the previous quarter, where cash handouts boosted private consumption growth by 6.7 per cent which, in turn, helped the economy chalk up a surprising 0.7 per cent growth from the previous year.
Investment and exports shrank even more sharply in the second quarter suffering from the poor outlook and production shutdown during the Movement Control Order (MCO) imposed in mid-March.
Only government spending proved supportive as it grew 2.3 per cent y-o-y. Although it added just a minuscule 0.26 percentage points to headline growth, the very fact that it is a positive contributor is laudable, as other countries are also showing that disbursing stimulus money is not as easy as it seems.
However, as nasty as the numbers were, there are silver linings. For one, looking at intra-quarter performance, while the April and May contractions were deep, most activities had rebounded encouragingly by June and beyond – signalling to us that the worst is over.
While the MCO compounded the economic damage in the second quarter, the payoff is clear now: Malaysia has gotten its pandemic situation under control and that will aid the economy to regain its footing.
CONSUMPTION DIDN’T HOLD UP
The second-quarter data shows the scale of the destruction that the pandemic has brought on the Malaysian economy over the period.
Looking at the expenditure component details, it is clear the bulk of the pain came from a sharp pullback in household consumption and investment activities.
Since private consumption makes up a bulk of the Malaysian economy – it commanded a hefty 61.7 per cent of GDP previously in the first quarter – whatever happens to it would have an important bearing on the economy.
Before the GDP figures were released, we had fairly high hopes the relative strength of consumption we saw in the first quarter could put the Malaysian economy in a better stead to withstand the onslaught of the challenges in the second quarter.
Moreover, we had anticipated better pass-through from the rounds of stimulus handouts by the government, as well as the positive net effect of a loan moratorium – in which individuals were offered blanket suspension of loans servicing for half a year – to at least cushion the blow more robustly.
EFFECTS OF THE MCO
Instead, it appears that the more dramatic effects of being locked down at home for nearly two months during the MCO, as well as concerns over rising unemployment ticking up to 5.3 per cent in May before coming down to 4.9 per cent in June, had greater impact on private consumption. Consumers chose not to spend the full amounts of the handouts they received.
Private consumption’s massive decline of 18.5 per cent y-o-y shaved off headline GDP growth by a hefty 10.7 percentage points over the period, instead of a much milder 4 to 6 percentage points we had pencilled in.
The other contributor to this deep decline is the exports sector, which shrunk by 21.7 per cent y-o-y and cut overall growth down by nearly 14 percentage points.
Given the production shutdown during the MCO, coupled with a deep global demand slump, the pullback in exports does not come as a surprise.
If anything, by June, we already saw a sharp recovery in this segment – with positive growth, rather than a contraction as had been expected.
In net trade terms, the damage was blunted by a rather sharp decrease in import activities as well. Indeed, the shrinking of imports – due to pullback in demand from Malaysian consumers and businesses alike – contributed a net positive 11.3 percentage points to headline growth.
Elsewhere, investment activities shrank by nearly 29 per cent y-o-y, negating headline growth by over 7 percentage points, as businesses pulled back from any major investment undertaking understandably during a period of massive uncertainties.
ROAD TO RECOVERY
As painful as the multiple hits were throughout the data, however, there are silver linings. Indeed, Malaysia’s central bank, the Bank Negara Malaysia (BNM), has rightly pointed out the multiple V-shaped uptick in a number of key indicators.
Indeed, even though April and May saw deep contractions across major economic indicators ranging from trade and industrial production to credit card spending and electricity generation, there has also been a sharp recovery starting from June, akin to the uptick in export activities.
The second-quarter pain might have been sharper than expected and will pull down our 2020 growth forecast for Malaysia from -2.6 per cent to -5.1 per cent y-o-y. But our baseline expectation is for a fairly steady sequential uptick from here.
We see GDP growth still negative in the third quarter, but at a milder -4 per cent y-o-y growth before reaching 0 per cent in the fourth quarter.
For their part, BNM is now expecting the 2020 growth to be within the range of -3.5 per cent to -5.5 per cent, compared to -2 per cent to 0.5 per cent before.
When it comes to policy reactions, there is a good chance of the BNM cutting interest rates further by 25 basis points to a new record-low of 1.5 per cent when the monetary policy committee meets next on Sep 10.
The timing of the cut would be favourable, as it would likely come just before the expiration of the six months loans moratorium.
The authorities have extended the moratorium for some categories of borrowers, particularly those who have unfortunately lost their jobs, and also allowed for proportionally reduced payment for those who saw pay cuts.
But this moratorium will no longer apply in blanket terms to all categories of borrowers.
Therefore, given that the moratorium has been a key factor in supporting private consumption – which would have slumped even more considerably in the second quarter – it is necessary to allow the rest of the borrowers to gradually ease into repaying their loans.
Hence, continuing to help the majority of borrowers amid a still uncertain environment, by easing interest rates could be one factor of consideration, especially when the inflation outlook remains tame, with BNM still keeping to the projected range of -1.5 per cent to 0.5 per cent for this year.
Overall, even though we are sympathetic to the view of a second-half economic recovery espoused by BNM, we see that, on balance, the sharp magnitude of the second-quarter’s GDP hit and the still uncertain global outlook in the second half of 2020 would warrant another interest rate cut.
After all, the year 2020 has been so full of surprises that it is better to err on the side of caution.
Wellian Wiranto is an Economist at OCBC Bank.