We envisage Malaysia's GDP growth pace in 4Q2021 to come in at 4.2% y-o-y (3Q2021: -4.5%) given the pickup in economic activity at the time as more states transitioned into Phase 2 of the National Recovery Plan. Our estimate is based on improved high-frequency indicators in 4Q2021 vis-à-vis 4Q2020; such an indicator is the Industrial Production Index, that is in parallel with the Malaysian Institute of Economic Research's Business Conditions Index for 4Q2021, which had rebounded by 25.0 points to settle at 122.0 on the back of increased sales – both domestically and externally – and capital investment. With 4Q2021's expected GDP growth performance, full year 2021 GDP growth pace should come in at 3.3%.

Given the government's policy pronouncements, we do not expect any more movement control orders in 2022. With Malaysia's successful vaccination programme and, among other things, the reopening of the travel sector, we expect pressure on GDP growth to recede further down the road. We also expect that Bank Negara Malaysia will only tighten its monetary policy in 2H2022 after domestic demand has gained more traction. Against this more favourable backdrop in 2022, we expect GDP growth pace to come in at 5.7% for the year.

Higher energy prices and the ongoing supply-chain disruptions will continue to pose an upside risk to inflation in Malaysia. With economic activity normalising, inflation is expected to edge up further from 2021's average monthly headline inflation rate of 2.5%. However, the upside risk should remain contained by, besides fuel inflation's dissipating base effect, the continued slack in the economy and still elevated unemployment rate (December 2021: 4.2%). We forecast 2022's average monthly headline inflation rate to come in at 2.3%.

Given the sluggish phase of economic recovery Malaysia is undergoing, it is not surprising that the economy is still nowhere near overheating. The Malaysian economy has not been spending as much as it should given the low-interest rate environment. Inflation thus remains relatively mild when compared with the situation in advanced economies where it has surged to decade highs. In other words, Malaysia has yet to reach a situation where it needs to tighten monetary policy to clamp down on inflation. For now, clear supply-side growth policies are needed to turbo boost recovery in 2022. Tightening monetary policy at this stage of its recovery will send unintended signals to the corporate sector and distort near-term growth prospects.

Contacts:
Firdaos Rosli, +603-2717 2936/ firdaos@marc.com.my
Lee Si Xin, +60-2717 2942/ sixin@marc.com.my
Lyana Zainal Abidin, +60-2717 2912/ norlyana@marc.com.my