Friday 29 Mar 2024
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KUALA LUMPUR (May 13): Central bank governor Datuk Nor Shamsiah Mohd Yunus today cautioned Malaysians to expect a “deep contraction” in gross domestic product (GDP) in the second quarter April to June, owing to a near shutdown in the economy under measures taken to counter Covid-19 pandemic.

The contraction would be the first since the Global Financial Crisis, when the Malaysian economy shrunk by 1.1% in the third quarter of 2009.

The central bank will announce its revised full year GDP forecast in the second half of the year, when there is more clarity in the data and outlook.

Although the local economy did not contract in the first quarter of the year, the mininal 0.7% expansion underscored the initial impact of Covid-19 as well as the implementation of a movement control order (MCO) towards the end of the quarter. 

OCBC Bank economist Wellian Wiranto believes the local economy could shrink by as much as 6% y-o-y in 2Q20, before eking out some gains in the second half of the year, to minimise full year GDP contraction to 0.5%.

“Having implemented a 100bps rate cut this year, we see Bank Negara keeping its powder dry and leaving the OPR unchanged at 2%, if such baseline scenario holds,” he said.

However, Wiranto expects BNM would not hesitate to cut the rate further below the present historic low to 1.5%, should there be any indication that growth momentum would suffer more deeply even after easing the MCO.

Despite his gloomy forecast, Wiranto cautioned that his projection depends on a number of caveats, including the non reimposition of restriction orders or a further extension of the current MCO which is scheduled to end on June 9.

“With political temperatures rising yet again ahead of the reopening of Parliament, any further uptick will inadvertently hurt the path towards recovery, as well,” he pointed out.

RHB Investment Bank Bhd economist Ahmad Nazmi Idrus concurs with Wiranto.

His GDP forecast is slightly more bullish as he projects a 4% contraction this year.

“Even with the easing of the MCO recently, we believe consumers will remain wary due to the risk of a new wave of infection,” he wrote in a note today.

While noting that the economic performance in the second quarter would see greater negative impact as more countries imposed lockdowns or restricted economic activities, MIDF Research was less pessimistic than its peers as it projects the economy will now contract 2.1% from an initial forecast of 1% y-o-y growth. 

Still, it said both consumer and business sentiments would remain weak for a substantial period due to huge uncertainties over Covid-19 and when a vaccine may be developed.

“Deteriorating travel sentiment will be a blow to ASEAN countries in particular as tourism plays a vital role in the economy.

“Private consumption, the biggest driver of the economy on top of private investment, is seen to be significantly affected, following extensions of the MCO,” MIDF said in a note today.

However, it expects the “government-side” to perform better in terms of consumption and investment. In addition, the stimulus packages and overnight policy rate (OPR) cuts are expected to cushion some of the adverse impacts, as would low inflation. 

Private consumption surprisingly resilient in 1Q20

Given the current economic situation, private consumption has remained surprisingly resilient, economists say, likely on the back of consumers dipping into their savings.

RHB’s Nazmi noted that consumption indicators such as consumer confidence and retail sales are at record lows while the unemployment rate has soared to a new high. “We think consumption is supported by consumers tapping into their own savings, and partially aided by the government stimulus measures,” he observed.

Private consumption moderated to 6.7% from 8.1%, but growth remains high compared to historical trends, Nazmi pointed out.

OCBC Wiranto said it was heartening to see private consumption’s lingering strength in the first quarter, given the increasing share that it commands — nearly 62% of GDP compared to the average of 57% and 59% in the last two years.

However, he observed that the second quarter prospects of private consumption were “concerning”.

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