MARC: Malaysia economy to rebound in 2021, growth will remain below potential

Malaysia’s GDP growth, which tumbled to 0.7% y-o-y in 1Q2020 is expected to decelerate further in 2Q2020 as the full impact of the Movement Control Order (MCO) is reflected in weaker private consumption on top of the lacklustre pace of investments. While the 1Q2020 growth statistics generally came in above market expectations of somewhere between -1% and -2%, the strength of the economy in the first three months of 2020 was largely supported by robust consumer spending prior to the MCO period. Consumer spending grew at a strong pace of 6.7% in 1Q2020. Such growth pace, however, is likely unsustainable given the impact of COVID-19 on consumer sentiment and the labour market in the near term.

For the second quarter, economists are projecting a contraction in real GDP. This is unsurprising as the pace of private consumption will be impacted by a weaker labour market following a sharp increase in the number of unemployed. Malaysia’s unemployment rate surged to 3.9% in March, the highest since 2009, while the number of unemployed workers also rose by 17.1% y-o-y. In addition, the Malaysian Institute of Economic Research’s (MIER) consumer sentiment index dropped by 40% y-o-y in 1Q2020 and its employment index contracted by 41%, the most since the Global Financial Crisis (GFC) in 2008-2009. Given the decline in consumers’ purchasing power following a higher jobless rate, consumer spending growth will likely moderate significantly in 2Q2020.

On the investment side, statistics will also not likely be encouraging in the near term especially when the global economy is expected to morph into the “new normal”. Both public and private investments which contracted by 11.3% and 2.3% in 1Q2020 will likely continue to drag the economy as global and domestic business sentiment remains fragile. In Malaysia, this is reflected in the 29% decline in MIER’s business conditions index (BCI) since its recent peak in mid-2018. In the latest quarter, the BCI dropped by 12% y-o-y.