Smaller decline of 2.7% in Malaysia’s Q3 GDP

  • 2020-11-16 12:00:00
  • Reporter

During the July to September 2020 quarter, Malaysia’s GDP decreased at a slower pace of 2.7% from the 17.1% fall seen in the second quarter of 2020. The Department of Statistics Malaysia (DOSM) explained that the economic performance during this pandemic period is also measured on the monthly basis, where July posted a lower decline 2.7%, August contracted to negative 3.6% while September improved to a smaller negative 1.6%t. On a quarter-on-quarter seasonally adjusted, GDP rose to 18.2%, compared to the 16.5% fall seen in the second quarter of the year. 

The coronavirus pandemic has changed Malaysia’s economic landscape in terms of production level, household spending, investment and labour market. In the third quarter of 2020, a continuous recovery is seen in the country’s economic performance amid the challenges to contain the spread of the COVID-19 pandemic through various phases of Movement Control Order (MCO), the country’s lockdown, effective from June 10, 2020 with the reopening of economic activities and the lifting on the ban on interstate travel. As more economic sectors resumed, the unemployment rate fell slightly to 4.7% during the third quarter, as compared to 5.1% in second quarter. 

A rebound in Malaysia’s manufacturing sector helped growth rebound during the third quarter of the year, while other sectors showed an improved negative growth compared to the previous quarter. Overall, the performance in the third quarter was mainly driven by the Manufacturing sector, which grew 3.3% compared to the 18.3% fall seen during the previous quarter, supported by electrical, electronic and optical and vegetable and animal oils and fats and food processing products. The stronger growth was attributed to exports-oriented industries, which recovered at 5% growth, compared to a shrinkage of 13.5% during the second quarter. This was reflected in the performance of total exports during September 2020, which recorded a positive double-digit growth.  

The agriculture sector saw growth fall slightly by t0.7% due to the decrease in the fishing and rubber sub-sectors. However, other agriculture, oil palm and livestock sub-sectors offset the smaller decline in this sector. During the July to September 2020 quarter, Malaysia benefitted from the strong increase of crude palm oil prices which grew by 37.5%, as compared to 15% in the preceding quarter. This rise in crude palm oil prices was due to higher global demand from Malaysia’s major trading partners, India and China.   

The country’s services sector recorded shrinkage of 4%, an improvement from negative 16.2% in the second quarter of 2020. The improved performance in the finance and insurance and information and communications sub-sectors contributed to the reduced contractions in this sector. The wholesale and retail trade sub-sector recorded a smaller contraction of 2.5%, supported by the notable performance of the auto sector, which began to recover with a positive growth. This was in line with the exemption of sales tax for locally assembled cars and the lowering of taxes on imported cars by the Malaysian government, which boosted auto sales during the third quarter. Furthermore, since the country was still dealing with rising COVID-19 infections, sales of essential items were the driving factor of wholesale and retail activities. As a result, the retail segment posted a fall in profits, as sales fell compared to the year-ago quarter. Nevertheless, tourism-related industries such as food and beverage and the accommodation sub-sector registered a smaller decrease, driven by the lifting of the ban on interstate travel, which help drive domestic tourism activities. Malaysia’s transportation and storage sub-sectors remained depressed due to the steep decline in air transport, especially in the passenger segment.  

The country’s construction sector saw growth fall 12.4%, due to the decline in all segments, except for specialized construction activities. This was reflected by the returned to normal operating hours at the construction sites during Recovery Movement Control Order (RMCO). For the third quarter, among the states which performed better were Sarawak, Pulau Pinang and Terengganu. In terms of performance by sector, both public and private sectors recorded an improved negative growth. Malaysia’s mining and quarrying sector registered a smaller decline of 6.8%, from a shrinkage of 20% during the previous quarter. This performance was mainly attributed by improvement in the production of natural gas and crude oil and condensate. 

The Department of Statistics Malaysia explained that the unprecedented situation caused by the COVID-19 pandemic has affected the efficiency of production capacity, whereby some industries had to bear fixed or higher expenses on inputs but experienced a decline or slower outputs. This caused an increase in the input-output ratio or production efficiency, which subsequently marginalized the value added. This is significantly experienced by the accommodation, restaurants, retail trade and recreational and sports sub-sectors. A few industries also face challenges to sustain economies of scale due to the lack of demand. The absence of spending by overseas travelers has also caused a loss of income.  

As for the demand segment, private final consumption expenditure in Malaysia fell by 2.1%, compared to a decline of 18.5% during the second quarter of this year. This reflected the increased expenditure on essential items such as food and non-alcoholic beverages; housing, water, electricity, gas and other fuels and communication. Additionally, recreation and cultural services, restaurants and hotels and furnishing, household equipment and routine household maintenance, which constitute non-essential expenditure, registered improved negative growth during the third quarter. The lower price of automotive fuels and the competitive prices offered by tourism products encouraged domestic travel activities within states. In addition, active online shopping also helped drive private consumption. Consumption on transport improved to a smaller decline during the third quarter, supported by the substantial growth in auto purchases by consumers benefiting from the exemption of sales tax. Based on quarter-on-quarter performance, private final consumption expenditure grew to 28.9% during the July to September quarter. 

Government Final Consumption Expenditure expanded to 6.9% from 2.3% during the second quarter, due to higher spending in supplies and services. 

During the third quarter of 2020, the Department of Statistics Malaysia said that the exports of goods and services decreased at a slower pace of negative 4.7%, compared to negative 21.7% seen during the previous quarter of 2020, mainly supported by a recovery in goods. However, the exports of services remain subdued as international borders remained shut for tourism activities. The imports of goods and services registered a lower decline of negative 7.8%, compared to a plunge of negative 19.7% seen during the April to June 2020 quarter, due to the improvement in the imports of goods, while the imports of services further declined in step with the lower outbound travelers. Net exports increased by 21.9% from a shrinkage of 38.6% in the previous quarter. Regarding the continued performance of Malaysia’s exports and imports of services, as borders are remain closed for tourism activities, the exports of services continue in the decreasing trend. 

The investment on fixed asset or known as Gross Fixed Capital Formation (GFCF) decreased 11.6% in the third quarter of 2020, due to the decline in all type of assets namely structure, machinery and equipment and other assets. The declining trend in GFCF has been observed since the first quarter of 2019 and the DOSM noted that this is a concern, since investment plays a significant role in a country’s future output generation. The reduction in investment may cause a lower capacity for future production and subsequently will affect the potential output, the Department said. 

Over the past few months, the DOSM noted that most Malaysian businesses have reviewed their business strategies to ensure business sustainability while adhering to standard operating procedures during the MCO. This includes reducing operating hours and limiting the number of employees working at a particular time. Subsequently, the number of employed persons working less than 30 hours per week, known as underemployment, rose during the first three quarters of this year. This leads to labour under utilisation. 

The Leading Index (LI) which is used to predict the direction of economic movements in the future, soften to 108.5 points in August 2020 and remains at 7.6% annual change, in an indication that the Malaysian economy will continue to recover in the coming months.  Nonetheless, the third wave of COVID-19 and the re-enforce of Conditional Movement Control Order in Peninsular Malaysia (except for Perlis, Kelantan and Pahang) present a challenge to the anticipated economic rebound seen by the LI. 

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