Based on the latest MPS assessment, the global and domestic economic outlook was largely unchanged from the previous assessment. The resurgence of positive COVID-19 cases in Malaysia prompted the government to reimpose tighter containment measures in June 2021 to curb further spreading. Consequently, the "Total Lockdown" hammered recovery in 3Q2021 as the pandemic peaked in August. The number of positive COVID-19 cases has been on a downtrend since the later part of August, and the economy is now in line with the National Recovery Plan (NRP). BNM reassures that the economy will likely recover after the weak 3Q2021 gross domestic product (GDP) performance.

Looking ahead, the economy is expected to gain a better recovery momentum in 4Q2021 and, subsequently, experience expansion in 2022. An uptrend in global demand will support the growth and increase private sector expenditure against the backdrop of continuous expansionary fiscal measures. Nevertheless, weaker-than-expected economic performance among Malaysia's largest trading partners, supply chain disruptions and another wave of COVID-19 containment measures will pose downside risks to Malaysia's growth outlook.

BNM also took note of the rising global inflation due to stronger global demand, supply chain disruptions, higher commodity prices and shortages of labour. The central bank maintained an inflation projection in the range of between 2.0% and 3.0% for 2021, which is in line with our expectation of 2.7%. We concur with BNM's view that the underlying inflation will remain muted to average below 1.0% due to spare capacity in the near term.

Going forward, we expect BNM to maintain the OPR at the current level before normalising interest rates after mid-2022. The alternative scenario is that the OPR would be raised earlier if the US Federal Reserve and other regional central banks unexpectedly embark on monetary policy normalisation. This probable scenario would help curb capital from flowing out and ringgit from weakening, but post-COVID recovery may be incomplete. Additionally, the recent MPS signals no imminent changes to monetary policy. We hope the following MPS will provide more hints on how BNM would tackle interest-rate normalisation in the coming year.

With that in mind, we project the Malaysian economy to experience a trough in 3Q2021, with GDP growth to come in at -3.7% year-on-year (y-o-y). Domestic demand was depressed due to the nationwide lockdown and concerns about the pandemic, offsetting robust export performance. The brunt of lockdown on the economy is evident in the steep decline in retail and recreation footfall to the lowest level since the first Movement Control Order (MCO 1.0) imposed in March-May 2020, based on data compiled by Google Mobility. Consequently, retail sales suffered a contraction of 8.1% and 7.5% y-o-y in July and August. The Manufacturing Purchasing Managers Index (PMI) reading was below 50 throughout 3Q2021, indicating a deterioration in conditions for the industrial sector.

Exports will remain in the positive territory. The monthly export data in August and September 2021 recorded double-digit growth of 18.4% and 24.7% y-o-y. A rally in the prices of crude oil and crude palm oil (CPO) has lent some support to the export growth. We expect a rebound in 4Q2021 following a relaxation in the mobility restrictions as vaccination rates are approaching the requirement to achieve herd immunity. We believe that the pent-up demand and sustained export growth will be the main growth drivers in 4Q2021 since all states, except Kelantan and Sarawak, are now in Phase 4 of the NRP.

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