This article first appeared in The Edge Malaysia Weekly on May 18, 2020 - May 24, 2020

IT is not all doom and gloom for the Malaysian economy despite the chaos wreaked by the Covid-19 pandemic and resultant Movement Control Order (MCO).

The glass is half full, Bank Negara Malaysia governor Datuk Nor Shamsiah Mohd Yunus appeared to convey last Wednesday at a media briefing to announce first quarter gross domestic product (GDP) results.

For starters, GDP actually expanded 0.7% in the first quarter of the year contrary to the street’s consensus for a 1% contraction.

Nor Shamsiah indicated that the year-on-year growth of 0.7% — while the lowest since the third quarter of 2009 when the economy shrank 1.1% — was supported by moderating but resilient private consumption growth of 6.7%.

But she warned of a “deep contraction” in GDP growth in the coming quarter.

Although she did not provide a forecast, some economists project it could be as bad as -8% to -11%.

However, the central bank preferred to look ahead to the second half of the year when a nascent recovery is expected, before picking up pace in 2021.

A better second half

Any revisions to the central bank’s GDP projection of -2% to 0.5% would only be revealed in the second half of the year, the governor said, because there are still too many uncertainties at this point.

“We must understand that the uncertainties are both domestic and global, such as the phased opening of malls, restaurants and the entertainment, travel and leisure industries. Social distancing means many of these businesses will either remain closed for a while or operate with limited capacity.

“What we are certain [of] is that the second quarter will experience quite a deep contraction, before bottoming out and picking up again as we enter the third quarter. Improvement in growth is expected in the second half of the year, as we resume economic activity under the less restrictive Conditional Movement Control Order, and this growth should accelerate in 2021 as our trading partners also resume economic activity,” she added.

The economy will shrink this year, according to the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC) executive director Lee Heng Guie, who has pencilled in a 3% contraction, and Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid, who predicts a 1.5% decline, or half of Lee’s projection.

Lee sees a bigger drop because he believes the Malaysian economy cannot avoid a sharper contraction of 8.8% to 11% in the second quarter, underlining the full impact of the second, third and fourth phases of the MCO — notwithstanding the mitigating impact of the Prihatin stimulus package.

“The unemployment rate already jumped to 3.9% in March, an increase of 17.1% or 89,200 in unemployed persons to 610,500, compared with 521,300 a year ago. As at May 10, the Employment Insurance System data reported loss of employment totalling 25,283 — almost two-thirds of the total 40,084 in 2019 — and a total of 33,830 employers have applied for the Employment Retention Programme, benefiting 302,771 employees. This could presage potential retrenchments down the road.

“We expect a U-shaped recovery, with the economic contraction hitting the trough in 2Q and likely showing a smaller contraction (in 3Q) before recovering to a small positive growth in 4Q2020,” he tells The Edge.

Bank Islam’s Afzanizam agrees that economic activities will pick up in the second half as the economic stimulus is “sizeable”. Its impact can be more significant should the reopening of the economy be more consistent, he adds.

“Nonetheless, the 2Q2020 GDP could see a sharper contraction as the full effect of the MCO will be felt in April and May. The 3Q2020 GDP could still see a further decline but it could be milder as the economy becomes gradually operational.

He expects positive growth — albeit very marginal — in the last quarter as economic recovery gains momentum, but warns that the situation is “still fluid … the resurgence of new (Covid-19) cases will be closely monitored and this will determine our baseline scenario”.

Unemployment rate to surpass 4%, but deflation risks are limited

Bank Negara expects the unemployment rate for 2020 to surpass its earlier estimate of 4%, although Nor Shamsiah said it will be short-lived.

“I would like to stress that this is expected to be transitory in nature, and will be subject to the increase in pace of economic activities as the MCO is lifted. So you may see higher unemployment in April or May owing to business closures, but in the second half of the year, the labour market will gradually improve with rehiring and job creation in some sectors,” she said.

An unemployment rate that surpasses 4% is unlikely to cause a collapse in domestic demand, says Prof Datuk Dr Rajah Rasiah, distinguished professor of economics at the Asia-Europe Institute of Universiti Malaya.

Rajah also expects strong pent-up demand from the B40 and T20 once the MCO is completely lifted, but urges Putrajaya to promote the sale of Malaysian goods and services to prevent the current account “from becoming bad”.

Nor Shamsiah reiterated that the risk of deflation is limited in Malaysia, even though headline inflation is expected to turn negative this year.

“Inflationary pressures in 2020 are expected to be muted, mainly due to the projection of much lower global oil and commodity prices. As it stands, the negative March headline inflation of -0.2% reflected the sharp decline in fuel inflation. Although we expect headline inflation to average negative for the year, we currently assess the risk of deflation as low.

“For us to fall into deflation, we would have to have a prolonged, broad-based decline in prices, coupled with a collapse in demand. Only 20% of items in the CPI basket exhibited declines during the quarter, and core inflation is also expected to remain positive. Overall we expect prices to be supported as demand conditions gradually improve,” she said.

Rajah says deflationary risks will come from external rather than domestic demand as the World Trade Organization has projected world exports to fall by 12% to 32% in 2020.

“Being highly export-dependent, a crash in external demand could have a negative impact on Malaysia’s GDP, which is somewhat similar to what happened during the 2008/09 global financial crisis.

“My readings show that the government is taking several steps to avoid such a situation. In addition to fiscal stimulus, it is also putting together short-term plans to stimulate a recovery and prevent a steep contraction in some industries, and in the medium and long terms to introduce reforms to stimulate technological upgrading so as to support high-quality jobs and high wages.

“If effectively implemented, it could help reposition Malaysia favourably to catch up and overtake economies more severely hit by the pandemic,” he says.

Afzanizam says that then when the country is at full employment, this would mean an unemployment rate of 3.2% to 3.4%, which is common if we take into account the fresh graduates in the labour market and those that are in between jobs.

“Therefore, the unemployment of 3.9% and beyond certainly tells you the state of the labour market as there are many people out of jobs.

“This coincides with the sharp decline in the Consumer Sentiment Index (CSI), which fell to 51.1 points during the first quarter of the year. In that sense, consumers would be very careful in their spending habits.

“Despite that, we do not think that there is going to be a total collapse in consumer spending as salaried workers, especially those who are in the formal sector, would continue to spend. The loan moratorium for the next months would certainly help bump up their disposable income,” he notes.

Will digitalisation and structural reforms be quickly implemented?

Nor Shamsiah pointed to opportunities during the Covid-19 crisis to increase digitalisation and put structural reforms in place that could help businesses recover and capitalise on new trends.

“Covid-19 has accelerated the development of new technologies because of the need for social distancing. My point is that our long-term strategies must include measures to take advantage of these trends through structural reforms, especially digitalisation. This will ensure the country’s sustainability and competitiveness in the future.”

Given the plunging business and consumer confidence, swiftly implementing structural reforms could help restore confidence and allow businesses and workers to see that the glass is half full rather than nearly empty.

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