This article first appeared in The Edge Malaysia Weekly on August 17, 2020 - August 23, 2020

MALAYSIA’S gross domestic product (GDP) contracted 17.1% in the second quarter (2Q2020) — the steepest fall since the Asian financial crisis in 1998, when the domestic economy shrunk by 11% in the fourth quarter.

The GDP contraction is probably the worst among regional peers that have announced their second quarter growth numbers. Singapore declined 13.2%, Philippines 16.5% and Indonesia 5.3%.

Nonetheless, it is not that big a surprise given that Malaysia was among the earliest countries to impose a strict Movement Control Order (MCO) to contain the Covid-19 pandemic, bringing an abrupt halt to economic activities,.

Net exports declined 38.6% during the quarter from a contraction of 37% in 1Q2020, while private consumption dropped by a steep 18.5%, from 6.7% growth in 1Q2020.

Meanwhile, public consumption was the only component that did not contract; instead, it expanded 2.3% for the quarter. Growth for that segment was bolstered by the continued increase in emoluments amid lower spending on supplies and services (see table).

For the first half of 2020, the domestic economy shaved off 8.3% year on year.

In view of the large contraction, Bank Negara Malaysia has revised its annual forecast to -3.5% to -5.5% in 2020, compared with a range of -2% to 0.5% previously.

That said, policymakers have looked beyond the storm and already spotted green shoots.

Bank Negara governor Datuk Nor Shamsiah Yunus said that the height of the economic fallout was in April and indicates that the economy has already bottomed out.

“As Covid-19 cases declined and restrictions eased, economic activity expanded in May and improved further in June. I am cautiously optimistic that the worst is behind us,” she said in a media briefing last Friday.

She highlighted several key indicators that point towards a V-shaped recovery after the trough in April.

For instance, the Industrial Production Index in June hit 114.8 points from 76.5 in April while the Wholesale and Retail Trade Index also improved to 121.7 points in June from 74.6 in April. Credit card spending rebounded as well, to RM10.7 billion in June from RM6.5 billion in April.

Nor Shamsiah also noted that labour market conditions have improved. The unemployment rate trended down to 4.9% in June from its high of 5.3% in May. Jobless claims stood at 16,660 people in July from 18,579 in June while better hiring activity was seen in July.

Malaysia’s economy, said Nor Shamsiah, is expected to see a gradual improvement in 2H2020 on several factors, which include an improvement in global growth, the trade and tech cycle, opening of the domestic economy, and improvement in income prospects and sentiment on top of the help from the stimulus measures.

Meanwhile, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said in a TV interview that the country’s GDP contracted as sharply as 19.5% in May. However, the contraction in June was smaller at 3.2%, which he described as a sharp upswing.

Shamsiah explained that the revision in the 2020 GDP forecast comes amid the difference in underlying assumptions on growth and the MCO from the earlier forecast.

“The pandemic has had a larger than anticipated impact on the economic activity in 1H2020 this year and recovery is expected to be more gradual than previously forecast.

“During 2Q2020, most of the countries were in a lockdown. Given the severity of the lockdown, the IMF (International Monetary Fund) revised the global growth forecast from -3% in April to -4.9% in June 2020 as the depth of the downturn became more apparent worldwide,” she said.

Furthermore, she noted that the assumptions of the length of the MCO changed significantly and that resulted in a larger than anticipated impact on the economic output. “When we released our Financial Monetary Review in April, we assumed four weeks of MCO; however, it lasted for an additional three weeks until May 3.”

For 2021, Bank Negara forecasts the economy to stage a rebound in 2021 with GDP growth in the range of 5.5% to 8%. The turnaround is underpinned by both external and domestic demand, supported by a more favourable operating environment, said the governor.

Nor Shamsiah added that Malaysia will benefit from the rebound in global economic growth of 5.4% next year, as forecast by the IMF, in the form of higher trade activity that will generate a positive spillover into domestic demand. “We also project that all economic sectors will contribute to growth next year,” she said.

While there are concerns that private consumption may not be as robust as expected after the blanket loan moratorium ends, the central bank believes that with the signs of improvement in the labour market and income, it would help to support consumption.

Furthermore, the government has implemented several measures to lift consumption, such as tax incentives, Bantuan Prihatin Nasional and the Employees’ Provident Fund savings reduction.

In addition, Nor Shamsiah said the targeted loan moratorium will continue to provide debt relief to affected borrowers to cushion their debt burden and sustain spending.

With a more optimistic outlook for the economy’s gradual recovery in 2H following the sharp contraction in 2Q, one question that continues to linger is whether the central bank will announce another rate cut in its Monetary Policy Committee (MPC) meeting in September.

OCBC Bank economist Wellian Wiranto wrote in a recent report that he sees a good chance of Bank Negara cutting rates by a further 25 basis points at the meeting. “Even though BNM gives off an optimistic vibe in its 2H outlook, signalling that recovery is already taking place, we see that, on balance, the sharp magnitude of 2Q’s GDP hit and the still-uncertain global outlook in 2H would warrant another ‘insurance cut’ akin to its action in the July MPC meeting,” he said.

UOB Global and Economics Research Julia Goh concurs with the view that Bank Negara would make one more 25bps cut in the Overnight Policy Rate (OPR) for the year at the upcoming monetary policy meeting.

As Malaysia treads cautiously on the road to recovery, there are lingering concerns over the pandemic, which has seen a resurgence in several countries around the world. If another outbreak were to hit Malaysia, will there be sufficient monetary measures to deploy?

Nor Shamsiah admitted that there is “considerable uncertainty” over the pandemic but adds that the government, since reopening the economy in May, has been working at ensuring that flare-ups can be contained without a nationwide lockdown, thereby limiting the economic fallout.

“If there is a second outbreak, there is room for target policy measures to augment the ones implemented earlier. For example, the banks’ policy levers can be expanded and extended within this mandate so that the economy can endure these challenging conditions. Policy levers include monetary policy, liquidity measures and financial measures.

“Likewise, the government will retain some fiscal space to provide some stimulus for households and businesses if there is a resurgence,” she said.
 

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