KUALA LUMPUR (Nov 17): Fitch Solutions has revised its 2020 real gross domestic product (GDP) growth forecast for Malaysia to a larger contraction of 5%, from a 4.5% decline previously, due to risks to the country’s ongoing economic recovery posed by the third wave of Covid-19 infections.

Fitch Solutions said in a statement yesterday it had also revised its 2021 real GDP growth forecast for the country to 11.5%, from 6.3% previously, to account for a very low base 2020 would provide, especially for the second quarter.

"[In 2020,] domestic demand is likely to remain subdued and drag a recovery that will likely be led by the external sector through improving exports to other recovering economies, such as China, and shrinking imports on the back of slow demand,” Fitch Solutions said.

"The third wave of Covid-19 infections poses a serious, blanket threat to the ongoing recovery in Malaysia in our view. The average number of daily new cases in the first 15 days of November, at around 1,020, was more than twice than that of the same period in October, which averaged around 427 cases. 

"The highest number of [new] cases seen, as of Nov 12, in a single day was 1,755 on Nov 12. In response, the government has imposed a localised lockdown in Kuala Lumpur, the surrounding state of Selangor and Sabah in East Malaysia, so far avoiding a nation-wide lockdown. This is likely to reduce the positive momentum the economy has displayed with a swift recovery in 3Q20 (the third quarter of 2020), and we are dialing back our expectations for 4Q20 to post a slightly positive growth. 

"The risks are even more pronounced further out to 2021 since a wider and more stringent lockdown might have to be imposed if the third wave is not brought under control by then,” Fitch Solutions said.

Looking back, Fitch Solutions said Malaysia’s real GDP growth made a strong recovery in 3Q20 with a 2.7% year-on-year (y-o-y) contraction, from a record contraction of 17.1% in 2Q20.

Looking ahead, Fitch Solutions said private consumption, normally the key growth engine of Malaysia, is likely to remain subdued over the coming quarters given the heightened economic uncertainty that is likely to persist.

"Investment will likewise continue to drag on overall growth for the same reason. Government spending, meanwhile, is likely to only provide modest support to growth due to binding fiscal constraints,”  Fitch Solutions said.