DBS sees bigger 2020 GDP contraction of 6.8% for Malaysia, third wave of Covid-19 weighing down recovery

DBS sees bigger 2020 GDP contraction of 6.8% for Malaysia, third wave of Covid-19 weighing down recovery
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KUALA LUMPUR (Dec 3): Malaysia’s domestic growth in the fourth quarter of 2020 (4Q20) is expected to remain weighed down by the Covid-19 pandemic, with the pace of a recovery in private consumption potentially coming up short, DBS said in a report today.

The bank now expects Malaysia’s economy to contract by 6.8% in 2020, bigger than its previous estimate of a 5.5% contraction.

“Malaysia’s economic prospects appear to be heading south again against the backdrop of a third wave, and perhaps the most severe bout thus far, of Covid-19 infections in Malaysia,” said DBS senior economist Irvin Seah.

“While high-frequency data seems to suggest that the recovery in the external sector remains unabated, there have been renewed concerns over the growth performance, considering the impact of the latest wave of infections on domestic growth,” Seah wrote in a 2021 outlook report.

He added that Malaysia’s labour market remains weak, noting that although job vacancies picked up marginally in the summer, it remained below the monthly average of 81,000 vacancies prior to the pandemic.

Looking ahead, DBS is taking a more cautious stance, opting to maintain its growth forecast for 2021 at 6%.

“The government has projected a robust expansion of between 6.5% and 7.5% in 2021, but we reckon that this could be too optimistic. A big part of the so-called ‘rebound’ is merely arithmetic (the base effect),” said Seah.

He added that it will therefore be at least early 2022 before the end-2019 level of real gross domestic product (GDP) is fully retraced.

DBS said it expects policymakers to rely more on fiscal policy to stimulate growth going forward.

Bank Negara Malaysia (BNM) is also expected to pause its rate cuts until the second half of 2021 (2H21), when the recovery momentum is expected to become more pronounced, said Seah.

S Kanagaraju