Despite the rapid development and deployment of vaccines in recent weeks, COVID-19 will continue to force economies to balance a difficult trade-off between managing public health and driving economic growth. We anticipate that governments' response to the resurgence of the virus will likely challenge earlier forecasts for a V-shaped recovery in 2021.
As far as the major economies are concerned, we take note of the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development's (OECD) forecasts that the US economy will recover in 2021. However, political risks will weigh on such positive outlook given a large segment of the US population did not vote for President-elect Joe Biden. We have seen the speedy recovery in the Chinese economy and it will continue to perform well despite the resurgence of COVID-19. The European Union appears to be facing a realignment of new economic engagements in 2021 following the conclusion of the Brexit deal in late December last year.
We forecast that the Malaysian economy will record a contraction of 5.7% in 2020 and a rebound to 6.4% growth in 2021 due to the low base effect. This will be driven by private consumption (7.7%) and private investments (6.5%) amid a higher inflation of 2.0% while the unemployment rate is expected to remain elevated at 4.0%, subject to a full recovery.
If the present Conditional Movement Control Order (CMCO) were to persist, we expect another round of debt-led stabilisation policy to take place in 2021. This will likely strain Malaysia's fiscal position further as the government may need to revisit the recently raised debt ceiling of 60% of GDP and increase it to 65%.
The Malaysian labour market has somewhat improved in recent months, but it will likely trend sideways as the economy continues to perform below its long-term capacity. As oil prices have risen alongside the resumption of economic activities, naturally inflation will also similarly increase in 2021.
The overnight policy rate (OPR) will remain low at 1.75% throughout 2021 as further rate cuts will be unlikely. We expect more upside for the ringgit given that its real effective exchange rate (REER) is currently trading at one standard deviation below its 10-year mean.
Overall, COVID-19 shaped the global and the Malaysian economies in 2020 and, due to the resurgence of new cases, this will continue in 2021.
A full report of the Economic Outlook 2021 can be accessed here.