Posted Date: February 5, 2021

The economic recession due to the outbreak of COVID-19 will soon be proven to be the world's most devastating crisis since the Great Depression. As a small and open economy, Malaysia has not been spared from the brunt of these twin health and economic crises.

We forecast that Malaysia will record the sharpest contractions in both its real GDP growth and public investment since the 1998 Asian Financial Crisis (AFC) at -5.7% and -19.8%. All GDP expenditures are expected to decline in varying degrees, but we project public expenditure to expand by 4.6% y-o-y due to fiscal injections in 2020. A detailed breakdown of our projection for the year, including our preliminary 2021 forecast, is outlined in Table 1.

Table 1: Breakdown of GDP based on expenditure in 2019 and MARC's forecast for 2020 and 2021.
Growth (% y-o-y) 2019 2020F 2021F
GDP 4.3 -5.7 5.6
Domestic demand 4.3 -5.6 5.8
Private consumption 7.6 -4.2 6.2
Public consumption 2.0 4.6 3.3
Private investment 1.6 -12.6 5.8
Public investment -10.8 -19.8 8.3
Real exports -1.3 -9.0 5.6
Real imports -2.5 -9.3 5.3
Net exports 9.7 -7.0 7.6

Despite various attempts to support aggregate demand throughout the crisis, we posit that private consumption will take a hit in 2020 decreasing by 4.2%. Nevertheless, it will remain the mainstay for Malaysia's growth, partly underpinned by policy stimulus such as the cumulative 125-bps cut in the overnight policy rate and fiscal support to vulnerable groups. We expect growth in private consumption in 2021 to be sluggish following the trend of previous recessions.

We expect Malaysia's GDP growth to be supported by trade as exports outpace imports, albeit lower compared to pre-pandemic levels. Exports will continue to gain traction from the upturn in global electronics demand as well as the increase in commodity prices. A rebound by Malaysia's major trading partners such as China and Singapore will also buttress the country's near-term growth.

We anticipate that the decline in aggregate demand will cause the inflation rate to register at an average of -1.1% in 2020. As demand picks up alongside higher energy prices, the inflation rate will likely rise to an average of 2.0% in 2021.

Although Malaysia was able to contain the spread of COVID-19 following the first Movement Control Order (MCO) in 2Q2020, the unemployment rate spiralled upwards from 3.3% to 5.3% during this period. It has remained elevated and we project that it will continue to trend sideways throughout 2021. Therefore, we anticipate that the unemployment rate will come in at 4.5% in 2020 before declining to 4.0% this year.

While investment is set for a rebound to growth this year, owing to the low-base effect, it will remain constrained by persistent mobility restrictions. Forward-looking indicators such as the Purchasing Managers' Index suggest weaker business sentiment as daily COVID-19 cases remain high.

As MCO 2.0 is less stringent than in its previous iteration, we expect real GDP growth to rebound in 2021, primarily due to the abovementioned low-base effect, to 5.6%. We forecast that all GDP expenditures will observe a similar trend but this is, undoubtedly, contingent on how the pandemic pans out internally and externally.

The present crisis will influence Malaysia's appetite for reforms. Judging from the impact of the AFC on the Malaysian economy, we expect reverberations from the present crisis to linger for some time and accentuate the economy's weak points. On this note, we are hopeful that policymakers will take a longer-term view with a short-term action plan and build the right foundation for a stronger growth trajectory when risks subside in time.

Firdaos Rosli, +603-2717 2936/firdaos@marc.com.my;
Lee Si Xin, +603-2717 2942/sixin@marc.com.my;
Nor Lyana Zainal Abidin, +603-2717 2912/norlyana@marc.com.my.