KUALA LUMPUR (July 12): Malaysia’s economic recovery in the second half of the year is expected to hit a soft patch amid rising inflation as well as dampening consumption level due to higher cost of living, according to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.

Speaking at a media briefing on Tuesday (July 12), Lee said stronger consumer prices and cost pressure are expected to weigh on domestic demand.

He said SERC has maintained its gross domestic product (GDP) estimation of 5.2% for the year and warned that there is a growing danger of global stagflation and the US economy could slip into recession.

“We expect the economic recovery momentum to continue in the second quarter of the year (2Q22), and we estimate the real GDP growth to increase by 6% to 6.5% year-on-year (y-o-y) in 2Q22 due to reopening of the economy, Hari Raya festive season and the Employees Provident Fund (EPF)’s fourth withdrawal amounting to at least RM40.1 billion.

“Meanwhile, the country’s external sector is expected to moderate due to weakening global demand and easing prices of energy and commodities,” he said.

On inflation, SERC estimates headline inflation to increase by 3.0% to 3.5% in 2022 and highlighted Malaysia’s inflation remain contained compared to other neighbouring countries due to various administrative measures such as subsidies and price ceiling on cooking oil, fuel, chicken and eggs as well as electricity and gas.

He also suggested the government provide a one-off cost of living tax offset or a one-off cost of living cash payment for poor households in need.

“For the bottom B40 households, the government should reduce out-of-pocket expenses for elderly care through higher tax allowance.

“The government also needs to reduce the cost and increase the access to medicine (drugs and health supplements),” he revealed.

Meanwhile, Lee also expected that Bank Negara Malaysia (BNM) will maintain a delicate act between growth and inflation.

Both the headline and core inflation have been trending up in recent months and SERC anticipates BNM to continue its gradual and measured pace of policy rate adjustments, depending on the incoming data, assessing the implications of evolving external and domestic developments on economic growth prospects and inflation trajectory, especially to anchor inflation expectations.

SERC, on the other hand, expects the central bank to raise the overnight policy rate (OPR) by another 25 basis points (bps) to 2.5% at the end of the year.

“Prolonged periods of low interest rates can induce financial imbalances by reducing risk aversion of banks and other investors as well as borrowers,” he revealed.

Recently, BNM raised its OPR for the second time this year to 2.25% in its July meeting, marking two successive rate hikes.