Posted Date: May 06, 2021
- The Malaysian economy remains weak. We expect 1Q2021 GDP growth to remain in negative territory for the fourth consecutive quarter, albeit at a more moderate pace of -1.6% y-o-y (4Q2020: -3.4%) mainly due to the low base effect. The decline will mark the longest consecutive quarters of negative growth in Malaysia since the Asian Financial Crisis of 1998.
- In the first quarter, tighter COVID-19 mobility restrictions due to a resurgence of COVID-19 cases had dampened domestic consumption and investment. It did not help that given the economic scarring effects of the pandemic, the unemployment rate had remained elevated and job creation slow. Amid this backdrop, consumer sentiment was understandably low. As such, the propensity to consume was also low, which led to a sharp rise in household savings. The government's stimulus packages have, as a result, had a muted impact. Though record-breaking in 1Q2021, export growth had not been sufficient to pull the economy out of the crisis in this quarter.
- Going forward, we believe that private consumption growth hinges upon the harshness of mobility restrictions. Given the just announced stricter COVID-19 containment measures, there will be pressure on private consumption growth, at least in 2Q2021. The pandemic's expected long-term economic scarring, which will likely keep the unemployment rate persistently above 4.0%, is another dampener. In February 2021, it came in at 4.8%.
- While there could be some turnaround in investments in full-year 2021, accentuated by favourable base effects, we see it subdued for several reasons. A case in point is government spending, which has turned cautious amid higher fiscal deficits and ballooning debt. Looming political uncertainties and the government's reactive handling of the pandemic has also shaken the confidence of foreign direct investors. The implications are grim given that FDI inflows are vital to growth capacity via capital formation.
- We believe net exports will continue to lend support to Malaysia's economic recovery. GDP growth data for 1Q2021 suggest that our major trading partners – including China (18.3%), Singapore (0.2%), and the US (0.4%) – are technically already out of their respective recessions. As such, our exports should receive support from sturdy commodity prices and a continued upturn in global electronics demand.
- Malaysia's headline inflation returned to positive territory in February 2021 and has continued to pick up due to cost-push factors. Due to the low base effect, we expect inflation to rise to over 4.5% in 2Q2021, but it will moderate to below 4.0% by year-end. We do not expect the impact of any further rise in oil prices to exacerbate the inflation situation given the ceiling for pump prices. We expect demand-pull inflation to slowly recoup lost ground, though anaemic labour market conditions will act as a constraint.
- We believe that Bank Negara Malaysia (BNM) will keep the overnight policy rate at its historical low of 1.75% for the rest of the year. With inflation returning, the real interest rate is likely to fall, and as such, further rate cuts will likely be off the table. In any case, there is little sign to suggest that BNM is in any hurry to adjust its policy setting in the immediate term.
- There remain many downside risks related to the pandemic, including those associated with policy responses, both internally and externally. The progress of vaccine distribution globally, for example, has been uneven and hampered by supply shortfalls. For Malaysia's services sector, which is the most significant contributor towards national GDP, recovery alongside other economic sectors will be difficult if international borders remain closed.
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