KUALA LUMPUR (Jan 4): The Malaysian economy is expected to grow at 5.2% this year, an improvement from the projected 3.4% growth for 2021, supported by the reopening of economic and social sectors, think tank Socio-Economic Research Centre (SERC) said.

Executive director Lee Heng Guie said SERC’s forecast is lower than the government's projection of 5.5% to 6.5% as he felt that private consumption is expected to face headwinds in 2022.

“I expect private consumption to recover, but there are some headwinds, mainly inflation risk and high cost of living,” he said in a virtual media briefing on Tuesday (Jan 4).

He also expected households to start rebuilding their savings and balance sheet, which will have an impact on the gross domestic product (GDP) growth.

“Bear in mind the government's (GDP growth) forecast (for 2022) was done sometime last October during the Budget 2022 announcement. Since then, there have been some developments, especially the unexpected pick up in inflation risk (and) the worst flood (in the country since the 2014-2015 floods),” he noted.

According to Lee, private consumption is expected to grow at 5.9% in 2022, which is lower than the government's forecast of 7.3%.

There are also some sectors that he foresaw having lower growth compared with the government's projections such as public investment and the real exports.

Although Lee predicted strong turnaround in public investment of 13.3% (still lower than the government estimated 24.1%) this year, lifted by higher development expenditure of RM75.6 billion, he opined that weak implementation capacity remains the key risk.

Real export growth is also expected to moderate to 2.9% (lower than the government estimated 4.2%) in 2022 from the estimated 18.3% in 2021, due to a high base last year.

He said real exports are also restrained by supply disruptions, worker shortages and slower global growth.

Lee noted that the local economy faces five major risks this year such as the Covid-19 contortions, the US Federal Reserve policy headwinds, China’s economic slowdown, price pressure and the winding down of domestic relief measures and policy changes headwinds.

He was cautious that the fast-spreading Omicron variant may temper the overall global recovery and drag Malaysia’s external sector.

He added that the rate hikes in the US will have a spillover effect to Malaysia’s shores via financial channels and a weaker ringgit against the US dollar.

He noted that a 1% decline in China’s GDP could shave Malaysia’s growth by 0.3% to 0.5%.

He was also cautious on higher input costs, supply constraints and shortage of workers.

Lee also expected the one-off "Cukai Makmur" (prosperity tax) announced in Budget 2022 to post downside risk to corporate earnings and reduce companies' dividend payments or payouts.

Lee is of the view that Bank Negara Malaysia (BNM) will raise the overnight policy rate (OPR) by 25 to 50 basis points to 2% to 2.25% in the second half (2H) of 2022.

“BNM is set to raise interest rates in the second half though the timing will depend on the growth trajectory and inflation risk."

Lee believed a removal of monetary accommodation is needed to rebuild buffers, with hikes in baby steps so as not to temper the country's recovery.

He noted that a prolonged period of low interest rates can induce financial imbalances by reducing risk aversion of banks and other investors.

He estimated that inflation will increase by 3% in 2022, higher than the estimate of 2.5% in 2021.

Headline inflation, as measured by the consumer price index, had consistently climbed higher to 3.3% in November 2021, marking four months of continuous rise from 2% last August.