Quarterly dip in economic growth

In recent weeks, several countries in South-East Asia have been announcing major dip in GDP growth.

The Philippines recorded a 16.5% decline in growth for the April-June period on a year-on-year (y-o-y) basis, which marks the biggest quarterly drop since 1981.

Singapore’s preliminary official data showed that the city-state’s economy shrank by 12.6% y-o-y in the second quarter. The final data will be announced today.

Meanwhile, Indonesia’s GDP plummeted by 5.32% in the April-June period, the lowest since the first quarter of 1999.

In the case of Malaysia, economists agreed that the economy would record its first GDP decline since 2009, after narrowly escaping a contraction in the first quarter of the year.

A Bloomberg poll of 16 economists showed a median GDP growth forecast of negative 9.5%. The individual forecasts ranged between a decline of 3% and 13.6%.

While projections may differ, the sharp drop in growth rate is not surprising.

The economy suffered as a result of the 47-day movement control order (MCO) to battle the Covid-19 outbreak, which brought most economic activities to a standstill and rattled the labour market.

The MCO began on March 18 and ended on May 3. During this period, only companies in certain sectors were allowed to operate, with the production capacity at 50%.

However, the rule has been gradually relaxed as the MCO was replaced by the conditional MCO (May 4-June 9) and the recovery MCO (June 10-Aug 31).

The full brunt of the MCO will only be felt in the second quarter, although economic activities have since picked up gradually.

Speaking to StarBiz, Alliance Bank chief economist Manokaran Mottain (pic below) said the economy is expected to be hit with a contraction of 6.7% y-o-y.

He expected the country’s private sector expenditure, which is a key pillar for economic growth, to moderate significantly due to the measures that have impacted overall retail sales.

However, the government’s spending is likely to be strong due to the higher allocation on stimulus measures.

Meanwhile, the gross fixed capital formation – an important indicator for investment performance – is expected to remain lacklustre given the supply chain disruptions and production shutdown amid the lockdown measures globally

“External trade performance would drag, led by persisting global supply chain disruption that have led to severe shocks on both supply and demand fronts as well as weak external demand.

“On supply-side, significant moderation or contraction is expected across the board, with an exception of the services sector, ” he said.

CGS-CIMB Research said, in a note, that the GDP contraction in the second quarter may be worse than the 11.2% decline seen in the fourth quarter of 1998, following the Asian financial crisis.

The research firm forecast a 12% GDP decline in the April-June period, in contrast to the economy’s marginal growth by 0.7% in the first quarter.

It said mining and manufacturing activities were hard hit in the second quarter, falling by 19.6% y-o-y and 18.1% y-o-y respectively.

In addition, distributive trade which fell by 31.2% y-o-y in the April-May period pointed to a likely steep decline in the services sector, according to the research firm.

“Agriculture was a rare bright spot for the second quarter, with palm oil production, which accounts for over a third of agriculture GDP, up 7.4% y-o-y due to delayed harvesting effects and yield recovery from previous lower fertiliser and dry weather impact, ” said CGS-CIMB Research.

Meanwhile, AmBank Research’s team of economists, led by Anthony Dass (pic below), forecast the Malaysian economy to shrink by 10% to 11% in the second quarter.

The forecast is based on the fact that the industrial production (IP) in the second quarter declined by 18% y-o-y on average, as compared with 0.6% y-o-y in the first quarter.

For context, the country’s IP plummeted by 32% y-o-y and 21.6% y-o-y in April and May respectively, but fell at a smaller pace by 0.4% in the month of June, indicating signs of recovery.

“The smaller contraction was due to stronger manufacturing which compensated the decline in mining and manufacturing, ” said AmBank Research.

Looking ahead, the research firm expected the downside risk on the economy to remain, albeit the signs of green shoots.

“The risk of the second wave of the crisis remains besides trade and political noises. On the labour market, challenges remain after the wage subsidy programme ends.

“Underpinned by uncertainties, we expect the full-year GDP to contract around -2% with the downside at -5% for 2020, ” it said.

On the bright side, CGS-CIMB Research believed that the second quarter would mark the trough or bottom for the GDP performance.

It also said that a quick rebound in economic activities, led by manufacturing, would set the stage for a recovery in the second half of 2020.

“Loss of employment eased from the peak of 18,600 in June to 16,700 in July and the manufacturing Purchasing Managers’ Index remained steady at the start of the third quarter (50.0 in July versus 51.0 in June), indicating that the economic contraction in the second quarter may be shortlived.

“We reiterate our GDP forecast of -3.5% y-o-y for 2020, ” it said.

While local economic activities are on the path of recovery, Alliance Bank’s Manokaran anticipated no quarterly growth for the rest of the year.

“Severe downturn during the second quarter will likely drag down the full-year GDP growth. We project full-year GDP to decline 2%. Expect continued moderation on the demand and supply front of GDP, with public and private investment, net exports, mining and construction sectors being the main drag, ” he said.