Our view on the outlook of the Malaysian economy is generally consistent with those presented by Bank Negara Malaysia (BNM) in its Economic and Monetary Review 2021. BNM anticipates a stronger recovery in 2022, with real GDP growth ranging between 5.3% - 6.3% (versus MARC Ratings' forecast of 5.7%). While we share BNM's view that the economic recovery would be underpinned by both external and domestic demand, we are less upbeat about the momentum of private consumption compared with the scenario envisioned by BNM. We foresee private consumption growth to pick up to 6.9% in 2022, lower than BNM's forecast of 9.0%.
Malaysia's economic recovery since the pandemic-induced recession has been moderate and uneven. We noticed that real GDP (seasonally adjusted) took eight quarters to return to pre-pandemic levels – a significantly slower recovery than post-2008 Global Financial Crisis (GFC), when it took only five quarters to return to pre-crisis peak. GFC resulted in a supply shock while the COVID-19 pandemic is more complex and profound, affecting both the demand and supply side of the economy. Nonetheless, both crises are primarily supply-driven.
On inflation, BNM foresees the headline Consumer Price Index (CPI) to rise at a faster pace of 2.2% - 3.2% in 2022 (2021: 2.5%) mainly due to cost-push factors because of higher commodity prices and global supply chain disruptions. We think that price controls will mitigate inflationary pressures for now. BNM also expects stronger demand conditions to lift core inflation to a range between 2.0% and 3.0% (2021: 0.7%). We concur with such forecasts. Headline inflation rate has hovered above the 2%-mark since the start of 2022 while core inflation rate rose to near the 2%-mark. Despite high expectations on inflation, we stand by our assessment that monetary policy will remain accommodative while normalisation will only take place starting 2H2022.
We deem BNM's expectation that labour market conditions would continue to improve, and that the unemployment rate would ease to 4.0% in 2022 (2021: 4.6%), to be realistic. Signs of encouraging hiring activity have emerged, evidenced by the declining trend in retrenchments and jobless claims. We believe that the government's plan to raise the minimum wage, if executed evenly across all sectors and regions, would hamper the hiring momentum. To be clear, we understand the minimum wage hike aims to cushion vulnerable households against cost-push inflation as the economy reopens. There should be no exclusions to the new ruling as the minimum wage is intended to protect workers against unduly low pay in the lowest income bracket. If micro and small industries are excluded, as recent official announcements suggest, we foresee no real economic benefits to the new minimum wage level.
In our view, the pace of recovery since the pandemic-induced recession is relatively slow, albeit with a significantly larger fiscal size seen in GFC. With mobility restrictions in place for too long, more fiscal support is needed for the Malaysian economy to return to full employment. Admittedly, the government has been managing the pandemic situation well, but the policies focusing on promoting future growth are still lacking. This may, in turn, affect the economy's fiscal metrics following a recovery. In echoing BNM's call for structural reforms, we also believe that Malaysia needs new thinking about how to address shocks in the future.
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