This article first appeared in Forum, The Edge Malaysia Weekly on August 15, 2022 - August 21, 2022

Recent data indicate that Malaysia is charting a healthy economic recovery. Gross domestic product (GDP) grew 5% in 1Q2022 and is likely to accelerate further in 2Q2022. This is corroborated by Bank Negara Malaysia’s decision to commence normalisation of interest rates, signalling confidence in the recovery.

Yet, we continue to see a flurry of negative news on the struggles faced by small and medium enterprises (SMEs) and households. Some have rallied for more withdrawals from the Employees Provident Fund and a larger disbursement of government support policies. There was also notably loud opposition to the last two overnight policy rate hikes.

It made me think: Why is there this dichotomy between data and sentiments?

Is the economic data wrong? Absolutely not. What is driving these sentiments then?

While there is the saying that bad news sells better, there is also a natural human tendency to give more weight to negative experiences than positive or neutral ones. As such, we are drawn more to negative news and see it dominating the headlines more frequently.

However, the issues raised are not entirely unwarranted.

One of the reasons for the dichotomy is the disproportionately lower transfer of wealth and income to employees from the economic recovery. The share of GDP earned by labour fell to a low of 34.8% in 2021, compared with the pre-pandemic level of 35.9% in 2019 (see Chart 1). A significant portion of the 9% growth in nominal GDP last year was largely amassed by capital owners, as denoted by the 14% increase in gross operating surplus. Meanwhile, compensation of employees grew at a mere 2.2% (see Chart 2). Put simply, employees are, unfortunately, not the main beneficiaries of the economic recovery so far.

For consumers and households, rising inflation is further eroding gains from economic and labour market recovery. Many consumers judge their financial well-being from their daily expenses. Thus, the sharp rise in prices of goods and services — particularly food-related — will hit budgets directly. As food constitutes around 30% of a typical household’s total expenditure — with it being even more pronounced among B40 households, who constitute 40% of the population — consumers will have no choice but to tighten their belts. Such struggles seem incongruent with a strong economy, regardless of what the overall growth numbers are showing.

For businesses, not all firms are charting the same level of recovery. Malaysia’s GDP so far has been mainly driven by the manufacturing sector (in particular electrical and electronics). Meanwhile, high commodity prices benefit the incumbents in those sectors. Moreover, headline growth was for the most part driven by large firms. The GDP contribution by micro, small and medium enterprises (MSMEs) only grew 1% in 2021, underperforming the overall GDP growth of 3.1% and larger firms’ 4.4% last year (see Chart 3). Given that MSMEs constitute close to 50% of overall national employment, the lag in economic recovery is also a cause of the dichotomy.

In this respect, there is merit in continuing targeted support programmes for the lower income segments of society and MSMEs. This will help prevent any further widening of income inequality in Malaysia.

On a brighter note, macro data has shown that the overall economy is in a much better state now than it was in the past two years, and it is poised to chart a relatively strong pace of expansion in 2022 and beyond. Households and businesses alike will benefit from the spillover effects of a sustainable economic growth, no matter how uneven it may be.

Woon Khai Jhek is a senior economist and co-head of economic research at RAM Rating Services Bhd

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.