THE upside surprise in the second quarter (Q2) gross domestic product (GDP) growth of 16.1% year-on-year (y-o-y) versus consensus estimate of 13.4%, bodes well for the full year growth estimate, but what is crucial to watch are the sequential third and fourth quarters of 2021.
Last year’s favourable low base effect due to the lockdown lifted GDP figures in Q2; but caveats about the transition to safer reopening of the economy under a four-phase National Recovery Plan and the worsening Covid-19 situation still apply.
The increased vaccination rate would loosen the movement control order, allowing more economic and social sectors to reopen and the country could begin its transition back to pre-pandemic times, which we expect to come in the fourth quarter of this year.
What can we glean from the numbers? Stripping off the base effect, Q2 GDP contracted by 2% from Q1’2021, reflecting the underlying still weakened domestic economic and business activities.
National recovery plans
With the exception of a decline of 1.5% y-o-y in Q2 (+0.2% y-o-y in Q1’2021; +0.9% y-o-y in Q2’2020) 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 Q2 vs -2.3% in Q1; -16.2% in Q2’2020), manufacturing (+26.6% in Q2 vs 6.6% in Q1; -18.3% in Q2’2020), mining (13.9% in Q2 vs -5.0% in Q1; -20.8% in Q2’2020) and construction (40.3% in Q2 vs -10.4% in Q1; -44.5% in Q2’2020)
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 had not only disrupted the production of agriculture but also the manufacturing sector, which is also hampered by the rising cost of raw materials and supply chains disruption.
The substantial benefit of a lower base effect also worked its magic on households’ consumption growth (11.6% in Q2 vs -1.5% in Q1’2021; -18.5% in Q2’2020), 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 Q2 (1.3% in Q1; -26.1% in Q2’2020). But, a pullback is expected in the second half (H2) of 2021 on cautious sentiment due to uncertain visibility of the reopening of the economy.
Once we see through the base effect, what should we look for?
Whether the growth will reverse its course in H2’2021. 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 will continue to overcome the disappearing of favourable lower base effect of Q2 ‘2020. We expect the worsening virus situation 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-fatigued and in despair as the deep economic scarring effects continued to disrupt the recovery and survival of many economic sectors and industries, especially micro enterprises and the small and medium enterprises (SMEs).
The findings of ACCCIM Malaysia business and economic conditions survey, covering the first half (H1) of 2021 and H2 of 2021 with a total of 693 respondents (91.8% of them SMEs) show that most businesses continue to struggle to cope with a long-drawn pandemic impact.
Their production and operation activities have been limited. There are cutbacks in demand and they are facing poor cash flow, credit and debtors’ conditions.
A total of 64.5% of respondents foresee economic conditions to be worse in H2 of 2021 compared with H1 of 2021.
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 H2 of 2021.
A total of 46.2% of respondents have experienced a very tight cash flow problem and are unable to cover business operations/production, raw materials/inventory, manpower cost for three months.
More than half of micro-enterprises (50.3%) do not have sufficient cash flow to pay their operating expenses for three months.
Sales were badly hit with 63.8% of respondents’ businesses being markedly below pre-pandemic level.
Of the total, 30.7% had sales of more than 30% below pre-pandemic level; and 13.4% suffered more than 50% below pre-pandemic level; particularly the tourism-related, construction and professional and business services sectors.The inflection point is the month of August, depending on the achievement of targeted vaccination rate of between 40% and 60% of the total population.
The third quarter is the deciding one to ascertain the magnitude of the impact from the prolonged restrictive containment measures and the households’ heightened concerned about the resurgence and fast spreading of new virus variants amid the acceleration of vaccination rate, especially in the Klang Valley.
The sooner-than-expected transition to stages two, three and four of the National Recovery Plan, and safer reopening of both economic and social sectors with higher manpower capacity will hinge on the number of workforces vaccinated.
Hopefully, by next month, we will see the resumption of inter-district-state travel, subject to strict standard operating procedures and vaccine passes.
For now, we maintain our 2021 GDP estimate at 4%, which is in line with Bank Negara’s markedly downward revision of growth estimates (to 3%-4% from 6%-7.5% previously) given the considerable uncertainties on the timing of a full reopening of the economy.
This may imply a longer and deeper dent on the GDP in third quarter (either a sharp slowdown or a contraction) before recovering gradually in the fourth quarter.
Lee Heng Guie is Socio Economic Research Centre executive director. The views expressed here are the writer’s own