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.

The economic outlook for the rest of the year also largely hinges on external factors. Trade statistics have, up to now, been far from encouraging. The World Trade Organisation (WTO), in its latest forecast, expects world merchandise trade volume to plunge by between 13% and 32% in 2020 due to the COVID-19 pandemic. As for semiconductors, one of Malaysia’s primary exports, global sales declined 3.6% in 1Q2020. According to the Semiconductor Industry Association (SIA), the weakness in global sales in 1Q2020 has not yet fully captured the impact of the COVID-19 pandemic.

The sharp drop in major commodity prices is also weighing on Malaysia’s growth prospects in 2020. The 48% plunge in global crude oil prices since the beginning of 2020 and the 25% drop in palm oil prices since its recent peak in December 2019 are exerting downward pressure on the Malaysian export sector. This is reflected in Malaysia’s 1Q2020 statistics whereby net trade declined by 37%. In March, Malaysia’s total exports declined by 4.7%, largely on account of electrical and electronics (E&E) exports that contracted sharply by 14%.

Against this backdrop, we foresee Malaysia’s real GDP to contract by 1.5% to 3.0% in 2020. Our latest projection takes into account the better-than-expected performance in 1Q2020. It also takes into consideration the likelihood of a slight rebound in global crude oil prices in 2H2020. This is critical as studies have shown that Malaysia’s real GDP would improve by roughly RM650 million for every USD1 rise in Brent crude oil price. Similarly, Malaysia’s government revenue is anticipated to increase by RM340 million for every USD1 increase in Brent crude oil price.

As for 2021, we are projecting real GDP growth to pick up to 6.2%-6.7% on account of the low base in 2020 as well as some recovery in private consumption and improvements in the external sector. While private consumption will moderate significantly in 2020, some normalisation could emerge especially when the COVID-19 pandemic starts to subside. On the external front, the WTO, in its latest forecast, is anticipating global merchandise trade volume growth to pick up by between 21% and 24% in 2021, after shrinking by between 13% and 32% in 2020. Given this possibility, we foresee the improvement in global trade to push up Brent crude oil prices to an average of USD45-USD50 per barrel in 2021. This will partly provide a boost to Malaysia’s real GDP growth and the government coffers in 2021.

That said, the wild card remains the duration of the COVID-19 pandemic globally. It should also be noted that our expectation of a pickup in GDP growth in 2021 does not suggest that Malaysia’s potential output, which reflects the productive capacity of the economy, will emerge from the crisis unscathed. This is because the longer the pandemic goes on, the larger the significance of the economic damage. On top of this, the new post-pandemic norm will mean a different set of business and consumer behaviour which, to some extent, will affect the macro landscape going forward.

Copyright Press Releases 2020