This article first appeared in Forum, The Edge Malaysia Weekly on October 5, 2020 - October 11, 2020

The title seems to imply that a recovery is imminent for the Malaysian economy. This is debatable, according to some people. For now, however, let us assume (economists’ favourite word) that, as always, an economic downturn will soon be followed by a rebound in sentiment as the “animal spirit” returns. This will lift economic activities. We also assume that the Covid-19 crisis will soon be behind us. Growth will pick up, slowly but surely.

Is this too optimistic a view? Not necessarily — some macro statistics suggest that such a scenario is already unfolding at this juncture. It is important to emphasise the phrase “at this juncture”, as uncertainties about future prospects have never been this high compared with recent economic crises. However, the questions that are increasingly being asked now pertain to the strength and sustainability of the recovery beyond 2021.

First, the positive signs: the monthly GDP estimate shows that the contraction was far less severe in the latest month (June) at -3.2% year on year. This was a far cry from April’s contraction of 28.6%, according to the Department of Statistics Malaysia (DOSM). For the July-to-September period, further improvement is expected as the economy continues to pick up pace, underpinned by more positive consumer and business sentiment.

Adding to the positivity is the jobless rate, which moderated to 4.7% in July from a 30-year high of 5.3% in May. We cannot yet draw a definite conclusion from this, however, as job losses may continue to sour consumer sentiment. According to DOSM, the rising number of employed people in July was due mainly to increased hiring in the services sector, particularly accommodation, food and beverage, and transport and storage activities. DOSM also produced a favourable assessment of the labour market in its recent report.

Third, despite a slight contraction in exports in August, Malaysia’s external trade performance has generally improved in recent months. In fact, exports registered two consecutive months of positive growth in June and July, averaging almost 6%. This stands in stark contrast to an average contraction of 25.5% in April and May. Exports to Malaysia’s two major markets — China and the US — actually jumped 21% and 14% respectively, signalling an improved global demand on the back of easing lockdowns globally. Such improvements will filter positively into net trade and GDP in the third quarter.

The positive sentiment was also reflected in the value of the ringgit, which has already appreciated 6.7% from its weakest point in March. No doubt, part of the strength came on the back of the greenback’s weakness, which was due to unfavourable macro developments in the US (for example, no clarity over additional stimulus packages and fears of another lockdown).

Still, resilient foreign fund inflows into the local bond market had helped the ringgit to be where it is now. Specifically, the bond market recorded positive net inflows for four consecutive months up to August. This pushed total net foreign inflows between January and August this year to RM4.3 billion, the highest in an eight-month period since 2016.

The general public is also comforted by Bank Negara Malaysia’s view, published in its latest monetary policy statement, that the economy is healing. Although noting that the pace of the recovery will be uneven across sectors, the central bank foresees an overall improvement that will continue into next year, supported by the recovery in both external demand and private sector expenditure. Bank Negara’s decision to pause its rate cut series also sent an important signal that the economy does not need further accommodative measures at this juncture.

Notably, there is a consensus that growth in 2021 will be stronger than initially expected. Bank Negara is looking at a range of 5.5% to 8%, while the International Monetary Fund, Asian Development Bank and World Bank are seeing a GDP growth of between 6.3% and 6.5%. That is robust by recent standards.

Now come the “buts”.

First, one has to bear in mind that the positive growth expected in 2021 will be partly due to the low base in 2020. In other words, after shrinking so much (especially in the second quarter of 2020), any improvement in the following quarters will be magnified. When compared with 2019’s level, however, the value of Malaysia’s GDP in 2021 will hardly show any growth.

The other critical issue is whether growth beyond 2021 would be as robust as in past years. This concern stems from the observation that growth trajectories normally change after a crisis. In fact, Malaysia’s primary growth has relied so much on consumer spending. For instance, about 71% of headline growth after the 2009 global financial crisis was driven by consumer spending. That is hefty. It is also worrisome because consumers’ buying patterns may change post-Covid-19.

This is quite possible, given the uniqueness of the Covid-19 crisis. In particular, the psychological impact of job losses cannot be underestimated. Previously, when jobs were lost, the situation recovered because the business landscape did not change materially. This time, some businesses and industries may be gone for good. Retrenched workers would then have to take time to reskill before they can be absorbed into other industries. This will induce cautiousness in their spending.

The first survey done by DOSM in April also reveals startling facts about consumers’ financial savings that can be used for future consumption. About 71% of self-employed workers reported that they would run out of savings in less than a month. Similarly, about 70% of those who had worked less than a year and 63% of those who had worked between one and three years had savings of less than a month. For those who had worked between four and 10 years, 81% will expect their savings to run out in two months.

Given such a scenario, to sustain its growth profile, Malaysia has no choice but to leverage other economic drivers such as investment. In other words, there is a need to keep energising investments. This is admittedly easier said than done, especially when the global economy is currently overshadowed by protectionism and trade wars.

The rise of China, Vietnam and other new East Asian trade powers also complicates matters when it comes to attracting foreign direct investments. However, comprehensive measures for institutional reforms and tighter coordination among government agencies to draw in investments are steps in the right direction. Such tireless efforts should continue.

Nor Zahidi Alias is an economist

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