Malaysian economic growth decelerates sharply y/y in Q1 2020, further weakness likely in Q2

Malaysian economy slowed down sharply in the first quarter of 2020. On a year-on-year basis, the economy grew 0.7 percent, a sharp slowdown from 3.9 percent recorded in the fourth quarter of 2019. However, it is slightly better than market expectations of a contraction of 1 percent. On a quarter-on-quarter basis, the economy shrank 2 percent, as compared with market expectations of a contraction of 2.7 percent.

On a year-on-year basis, the details were not as encouraging as the headline figure, showing softness throughout discretionary domestic and external demand. Private consumption performed better than expectations, rising 6.7 percent year-on-year in the first quarter, anchoring overall growth.

Nevertheless, at a detailed level the effects of the COVID-19 outbreak were apparent, with disparate growth between essential and non-essential categories. On a sequential basis, private consumption shrank 0.2 percent quarter-on-quarter, compared to an average 2 percent rise seen in the last four quarters. Unsurprisingly, given the fiscal push, public consumption was the sole component to accelerate at 5 percent year-on-year in the first quarter.

The contraction in investment intensified to 4.6 percent year-on-year, leading to a -1.1 percentage point drag on headline growth. This was partly countered by a build-up in inventories, which contributed 0.5 percentage point to headline growth.

Imports shrank 2.5 percent in the first quarter. Nevertheless export growth performed even worse, dropping 7.1 percent year-on-year. Markedly, the first quarter recorded services exports decline 23.1 percent year-on-year, even as exports of commodities and technology products continued to be weak. As such, the fall from net exports deteriorated to 3.2 percentage point in the quarter.

Meanwhile, on the supply front, services and manufacturing activity eased, while the agriculture, mining and construction sectors shrank.

“Looking ahead, we expect further weakness in Q2 to account for the bulk of the impact from the Movement Control Order (MCO). We expect private consumption to soften with the initial period of hoarding behind us, and a rise in the unemployment rate to 3.5 percent in Q1 (Q4: 3.2 percent). Manufacturing PMI in April fell to 31.3 the lowest value since the start of the series in mid-2017. At the same time, key commodity prices remain weak and forecasts for external demand look tepid. The Q1 growth number, while better than expected, nonetheless shows the severe impact of COVID-19 outbreak. Our read on the latest statement from Bank Negara Malaysia is that the door on further easing, conventional and otherwise, remains open”, said ANZ in a research report.