2021Q1: Malaysia: Uneven Climb to Recovery

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Executive Summary

A. World Economic Situation and Prospects

GLOBAL ECONOMY RETURNS TO PRE-PANDEMIC LEVEL IN 2021

• Global recovery continues amid uncertainty. Global economic prospects have improved in recent months, thanks to the rollout of vaccines, albeit at a different pace of vaccination across the globe, a gradual returning of economic normalcy as well as continued fiscal and monetary support amid high uncertainty about the path of the pandemic.
• The International Monetary Fund (IMF) expects the world economy to grow by 6.0% in 2021, up from its 5.5% forecast in January. GDP for 2022 is seen increasing by 4.4%, higher than an earlier estimate of 4.2%. The OECD expects global GDP to grow by 5.6% this year, and continues the recovery with 4.0% growth in 2022.
• Global economic indicators are on track. High frequency indicators such as global Purchasing Managers’ Index (PMI) readings for both the manufacturing and services continued to expand at a solid pace, thanks to rebounding activities, higher trade demand and reopening of the services sector. Industrial production has rebounded in most countries, contributing to firming commodity prices and robust international trade. Global semiconductor sales continued to grow at double-digit rates in January (13.2%) and February (14.7%) 2021, underpinned by increasing demand of digitalisation, data solutions and sensors, analog and logic products as well as the development of 5G technology.
• Attendant risks to the global recovery. With still high uncertainty about the path of pandemic and uneven pace of vaccination rates between the advanced and developing economies with the latter experiencing slower rate of immunisation, the policy makers must continue to provide fiscal and monetary stimuli to ensure a durable recovery ahead.
• The risks to temper global recovery are: (a) Pre-mature withdrawal of fiscal and monetary support measures; (b) New virus mutations could spark another wave of infections during the vaccination campaign or even prove resistant to the vaccines currently deployed; (c) Renewed trade and technology frictions between the US and China; (d) The unexpected rise in the US interest rate could pose financial risks, especially in emerging economies having high foreign currencies debt burden; (e) Sustained higher inflation due to the cost-push and demand-pull, compelling sooner-than-expected rise in policy interest rates; (f) Volatility in commodity prices; and (g) Geo-political tensions.

B. Malaysia’s Economic and Financial Conditions

STEADY STRIDES TOWARDS RECOVERY BUT GROWTH IS UNEVEN

• Continued scarring effects in 1Q 2021. The prolonged pandemic and re-implementation of less restrictive MCO 2.0, which was subsequently moved to targeted MCO/CMCO/EMCO/RMCO continued to have scarring effects on economic and business activities as well as consumer spending.
• The on-going national immunisation program holds the key to lift a sustained revival in consumer sentiment. Hence, the slowness in the rate of vaccination amid concerns over the occurrence of 4th wave, prompting more targeted MCO/EMCO are expected to have prolonged scarring effects on economic and business activities. At the time of writing, new infected cases continue to stay stubbornly high above 2,000 since 15 April and continuously rising to breach 3,000 daily cases in recent days.
• As long as the movement restrictions are less restrictive, the chances of a complete stalling of economic recovery are unlikely as the extreme “low base” effect in 2Q 2020 will give a strong lift to growth bouncing back in 2Q 2021. But we caution that 1Q 2021 could still be a sluggish growth and growth will turn positive from 2Q onwards though the magnitude of economic growth increases will depend greatly on the progress made in the immunisation program.
• SERC maintains its GDP growth estimates of 4.0% (base case) and 6.0% (upside) for 2021 amid continued economic scarring effects from the movement restrictions and restricted inter-state travel ban.
• Domestic demand is recovering. The pent-up demand and consumption booster measures, such as EPF withdrawals, cash handouts as well as the drawdown of savings that were unspent during the pandemic have helped to revive discretionary consumer spending. Footfall in the malls and shops as well as the number of patrons in restaurants, fashion and wearing apparel outlets have recovered though the sales still some generally 20-30% below pre-pandemic level. Purchase of durable goods, such as passenger cars and commercial vehicles increased by 28.8% yoy and 70.5% respectively in 1Q 2021, reflecting partly the rush for deliveries by companies meeting their financial year ending 31 March 2021; new model launches; and a low base in March 2020 due to the MCO. Imports of consumption goods grew by 10.1% in 1Q 2021. Household loans demand grew by 5.7% in March 2021 (3.7% in March 2020).
• Nevertheless, we caution that a slow and moderate recovery in the labour market (unemployment rate of 4.8% at end-Feb 2021) and continued high loss of employment (24,688 persons in 1 Jan-25 Apr 2021 as compiled by the EIS) would cap consumer spending. In addition, the wearing off effect of consumption-fuelled catalysts would pull the brake on consumer spending towards end-year and in 2022.
• We expect private investment to revive gradually (estimated 5.1% in 2021) this year from a decline of 11.9% in 2020, supported largely by investment in the manufacturing sector, especially the expansion of capacity in electronics and electrical products as well as rubber products.
• Mixed pace of recovery in economic sectors. Manufacturing sales have increased by 5.3% in Jan-Feb 2021, underpinned by higher output of electronics and electrical products, food products, as well as rubber and plastic products. The services sector still slowly on the mend – the wholesale and retail trade continued to decline by 0.2% and 2.3% respectively in Jan-Feb 2021. Some travel and tourism-related sub-services sectors would recover gradually and may take a longer while to fully restore their growth traction, depending on a complete lifting of inter-state travel restrictions and the reopening of Malaysia’s international borders to travellers and tourists.
• Exports continued to gain strong traction. Riding on the recovery in global demand and higher commodity prices (palm oil and crude oil), Malaysia’s exports have expanded robustly by 31.0% in March (17.6% in Feb; 6.6% in January). The main drivers were electronics and electrical products, rubber products, chemicals, and manufactures of metal and palm oil-based products. Exports are expected to increase by 9.0% in 2021 (-1.4% in 2020), underpinned by sustained demand of semiconductors and machinery equipment in tandem with increasing digitalisation and 5G technology development.
• Cost-push inflation will be calling the shots in 2021 amid still mending domestic demand. Headline consumer price index (CPI) will be getting normal from a depressed base in 2020. Much of short-term inflation pressure is a gradual normalisation of unusual disparities in supply and demand brought about by the COVID-19 pandemic, as domestic demand and economic activity recovers. SERC estimates inflation to increase by 3.0%-4.0% in 2021 (-1.2% in 2020).
• BNM reaffirms no change in the monetary policy stance. Despite the central bank’s projected higher cost-driven inflation (2.5%-4.0% in 2021), albeit a temporary spike to above 5.0% in 2Q due to low base effect, we expect Bank Negara Malaysia (BNM) to hold the overnight policy rate steady at 1.75% till end-2021. Given the moderate price pressures amid continued spare capacity in the economy, BNM reaffirmed that monetary policy will not be the most appropriate tool to manage supply-driven inflation.

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