Malaysia’s Gross Domestic Product (GDP) plunged by 6.2% y-o-y in 1Q09 following steep declines in export and industrial production. This was the largest drop in a decade since the Asian Financial Crisis of 1998 and technically marked the beginning of a recession.

The sharp contraction surprised analysts as consensus only expected a 3.9% decline y-o-y.

The direction and performance of Malaysia’s economy last quarter followed that of other major and regional economies, said Maybank Investment Bank in a report. The US, Eurozone, Japan and Britain slipped deeper in recessions, dragging down Asia’s export-oriented economies and financial centres with them.

OSK Research concurs, noting that sectors with high external exposure were hit the hardest. “The sharp drop was across all sectors with the exception of the construction sector,” it said.

Domestic consumption was expected to be resilient and cushion the contraction in external sectors. However, it also recorded a 2.9% annual drop in the quarter caused by declining private consumption and slower-than-expected implementation of infrastructure projects by the government.

Although RM6.37b or 91% of the RM7b government spending allocation under the first economic stimulus package was disbursed to the ministries, agencies and GLCs as of 12 May 2009, only RM0.79b or 11% was actually spent, observed Maybank IB.

None of the RM14.408b disbursed to ministries and agencies for government spending in 2009-2010 in the second economic stimulus package has been spent yet. However, with the government’s aggressive fund raising exercises, there will be a strong fiscal impulse in late-2009 and 2010 when actual spending begins for the implementation of annual budget and stimulus packages, it said.

OSK Research said the GDP results would have limited impact on corporate earnings of listed companies. The sharp fall in mining will only directly impact Petronas which remains committed to its capex program. Therefore, it would have a limited indirect or lagged impact on listed oil & gas players, it said.

The double-digit contraction in manufacturing – reflecting tough conditions on electronics & electrical (E&E) companies in Penang – will have little bearing on the broader stock market because the weightage of these companies is skewed towards MNCs. The market is likely to shrug off the poor construction numbers in anticipation of strong contract flows in the coming two months, it added. “Overall, we believe investors are already looking ahead to the economic recovery anticipated for 2010,” it said.

Affin Investment Bank said given the continued economic contraction in the EU and Japan, a more broad-based recovery for Malaysia’s export is likely to occur only from 4Q09 instead of its earlier 3Q09 expectations.

The government has revised its 2009 GDP forecast to contract between 4% and 5% (previously between -1% and +1%).