THE upside surprise in the 2Q 2021 (April-June) gross domestic product (GDP) growth (16.1% year-on-year [yoy] vs consensus estimate of 13.4%) bodes well for the full year growth estimate, but what is crucial to watch are the sequential third (July-September) and fourth (October-December) quarters of 2021.
Although last year’s favourable low base effect due to the lockdown lifted GDP figures in 2Q 2021, caveats about the transition to safer re-opening of the economy under a four-phase of the National Recovery Plan and the worsening virus conditions’ unpredictability still apply.
Increased vaccination rate would loosen the movement control order (MCO), allowing more economic and social sectors to re-open and the country could begin its transition back to pre-pandemic times which we expect to come in 4Q 2021.
What can we glean from the numbers? Stripping off the base effect, 2Q GDP contracted by 2% from 1Q 2021, reflecting the underlying still weakened domestic economic and business activities.
With the exception of a decline of 1.5% yoy in 2Q (+0.2% yoy in 1Q 2021; +0.9% yoy in 2Q 2020) in the agriculture sector, the very high growth in the following sectors should be viewed with caution, keeping the base effect in mind:
- Services (+13.4% in 2Q vs -2.3% in 1Q; -16.2% in 2Q 2020)
- Manufacturing (+26.6% in 2Q vs 6.6% in 1Q; -18.3% in 2Q 2020)
- Mining (13.9% in 2Q vs -5.0% in 1Q; -20.8% in 2Q 2020)
- Construction (40.3% in 2Q vs -10.4% in 1Q; -44.5% in 2Q 2020)
It is reckoned that export-oriented industries in the manufacturing sector have remained resilient, supported by the continued global tech upcycle and recovery in global growth.
However, the limited manpower capacity in those economic sectors that are allowed to operate have somewhat dampened output and may constrain businesses to take more orders on uncertainty pertaining to the “shut and open” stricter containment measures.
The shortage of workers not only disrupted the production of agriculture but also the manufacturing sector which is also hampered by rising cost of raw materials and supply chains disruption.
Concerns over pullback
The substantial benefit of a lower base effect also worked its magic in households’ consumption growth (11.6% in 2Q vs -1.5% in 1Q 2021; -18.5% in 2Q 2020), partly aided by continued cash flow relief and cash handouts as well as some release of pent-up demand. Private investment also jumped 17.4% in 2Q (1.3% in 1Q; -26.1% in 2Q 2020).
But, a pullback is expected in 2H 2021 on cautious sentiment due to uncertain visibility of the re-opening of the economy.
Once we see through the base effect, what should we look for? We need to check whether anecdotal evidence of a pick-up in economic and business activities; a sustained growth in household spending and investment demand continues overcoming the disappearing of favourable lower base effect in 2Q 2020.
We expect the worsening virus conditions and the “shut and open” stricter containment measures to continue weighing on business activities and households’ cautious discretionary spending.
People and businesses are battle weary, pandemic fatigue and despair as the deep economic scarring effects continued to disrupt the recovery and survival of many economic sectors and industries, especially micro enterprises and SMEs.
The findings of ACCCIM Malaysia Business and Economic Conditions Survey (M-BECS), covering 1H 2021 and 2H 2021 with a total of 693 respondents (91.8% are SMEs) show that most businesses continue struggling to cope with a long-drawn pandemic impact.
Their production and operation activities have been limited with cutbacks in demand and they are facing poor cash flow, credit and debtors’ conditions. 64.5% of respondents foresee economic conditions to be worse off in 2H 2021 compared to 1H 2021.
On the overall, 65.1% of respondents have no confidence of an economic recovery in 2021. A higher 62.5% of respondents expect worse business conditions in 2H 2021.
Blue skies ahead?
The inflection point is the month of August, depending on the achievement of targeted vaccination rate between 40%-60% of total population.
The third quarter (July-September) is the deciding quarter to ascertain to what extent is the magnitude of impact from the prolonged restrictive containment measures and the households’ heightened concerns about the resurgence and fast spreading of new virus variants amid the acceleration of vaccination rate, especially in the Klang Valley.
This comes amid sooner than expected transition to stage two, three and four of the National Recovery Plan (NRP), and a safer re-opening of both economic and social sectors with higher manpower capacity tied to the number of workforce vaccinated.
Hopefully, by September 2021, we could see more resumptions of inter-district-state travel subject to strict standard operating procedure (SOP) and vaccine pass.
For now, we maintain our 2021’s GDP estimate of 4% which is in line with Bank Negara Malaysia’s markedly downward revision growth estimates (to 3%-4% from 6%-7.5% previously) given the considerable uncertainties on the timing of a full re-opening of the economy.
This may imply a longer and deeper dent in 3Q 2021’s GDP in (either a sharp slowdown or a contraction) before recovering gradually in 4Q 2021. – Aug 14, 2021
Lee Heng Guie is the executive director of the think-tank, Socio-Economic Research Centre (SERC).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
