Serc | SERC

Global recovery is underway amid growing coronavirus cases. The global economy is slowly emerging from the devastating impact of the COVID-19 pandemic shock, thanks to the massive policy responses amid lingering concerns about rapidly rising infected cases and the availability of vaccines. The spike of cases in some countries in Europe and Asian have prompted fears of renewed lockdowns or stricter movement restrictions. Unlike during the first episode of virus infection, this time, governments are more well prepared to cope with it while protecting the economy.
The path of virus containment and vaccines availability hold the key. Barring unexpected major shocks, growth prospects for the global economy will critically dependent on the virus’ future containment path, and ongoing policy initiatives to revitalise and ensure a sustainable recovery. The pace and strength of recovery in advanced and emerging countries will remain uneven in 2H 2020 and 2021, depending on the different economic and health protection approaches.
Top five risks that may temper the global recovery: Given that the global economy is at an early stage of recovery, it remains susceptible to shocks and events that may undermine investors’ confidence and cause a shift in market sentiment. The US Presidential Election on 3 November is the key upcoming event and the main political uncertainty until year-end. The five key risks are: (a) New lockdowns to control a sharp spike in infection cases (a second wave or a third wave) may threaten the global recovery; the longer-than-expected vaccines availability would dampen confidence; (b) Premature withdrawal of fiscal stimulus and monetary accommodation. Central banks are expected to remain in accommodative mode for some time. Fiscal stimulus is still needed as a reduction of public-sector demand would trigger a renewed contraction of the economy; (c) A sudden reversal of investors’ positive optimism towards the stock markets on worries about the worsening economic outlook, could trigger sharp capital outflows and the tightening of global financial conditions; (d) Lingering uncertainties about the US-China’s tensions on trade and technology as well as political relations; and (e) Geopolitical events, including political events.

B. Malaysia’s Economic and Financial Conditions

HARNESSING THE RECOVERY PATH TO THE NEXT NORMAL

The worst of economic contraction in 2Q 2020 is behind us. Malaysia’s real GDP contracted sharply by 17.1% yoy in the second quarter of 2020 (+0.7% in 1Q), the deepest one quarter slump in Malaysia’s economic history on record. What had caused a RM1.5 trillion economy came to a screeching halt in 2Q was “sudden stop” in economic and business activities due to the Movement Control Order (MCO).
Economic indicators show signs of recovery, albeit unevenly. SERC concurs with Bank Negara Malaysia’s assessment that the “shock” pandemic economic contraction has hit a trough in 2Q and the stabilisation has started to trickle in since June, raising cautiously optimism that real GDP will show a much more moderate pace of decline or positive growth in 3Q and 4Q 2020 respectively. The risk to our expectations lies in the virus development following the recent spike in new infection cases, prompting the implementation of Targeted Enhanced Movement Control Order (TEMCO) in some areas in Sabah.
The 2021 Budget on 6 November calls for targeted fiscal expansionary stance. BNM’s monetary policy and liquidity measures will remain supportive in the foreseeable future. Therefore, fiscal policy will be the key policy variable going forward to support domestic demand.

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Published in Quarterly Economy Tracker

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