GDP growth to dip to 2.5% on Covid-19, weak oil price


MALAYSIA’S GDP growth is forecast to grow at a weaker pace of 2.5% in 2020 from 4.2% forecast earlier due to the impact of Covid-19 and weaker crude oil prices.

Standard Chartered Bank (StanChart) analysts Edward Lee and Jonathan Koh said the pandemic severely disrupts the global supply chain and impacts domestic and external demands.

“Our previous projections were based on a sharp — but brief — supply chain disruption due to China’s restrictive coronavirus containment measures and the resulting temporary impact on local and external demands; for example, through reduced tourism.

“However, we raise our 2021 GDP growth forecast to 4.8% from 4.4% previously on a favourable base effect,” the analysts said.

StanChart said while supply chain distributions in China should end with the return of the country’s productive capacity, the impact on demand from Covid-19 has now become broader, deeper and more protracted than earlier projected.

“Our initial working assumption was a sharp hit to economic activity mainly in Asia in the first quarter (1Q), with a lingering impact in the 2Q prior to a normalisation in the second half of the year,” it said.

It added that governments around the world are progressively introducing containment measures that are necessary, but likely to be negative for growth in the short term.

“We, therefore, see a more prolonged hit to both local and external demands in Malaysia even as supply chain disruptions in China normalise,” it said.

Affin Hwang Investment Bank Bhd has also revised its forecast for Malaysia’s real GDP growth to 3.3% for the year on slower exports and manufacturing sector output.

StanChart expects Bank Negara Malaysia to lower the Overnight Policy Rate to 2% with a cut of 25 basis points each in May and July.

“The last monetary policy statement in March appeared to be more balanced than outright dovish, suggesting the central bank is open for further easing, but in a dependent manner,” it said in a research report last week.

StanChart said since the last Monetary Policy Committee meeting this month, the coronavirus pandemic has worsened globally.

The bank lowered its 2020 inflation forecast to 0.8% from 1.9% previously as the falling oil prices lead to lower fuel prices at the pump.

The bank added that the increase in infection cases and broad containment measures may affect local sentiment.

Private consumption, which has been a key growth support and is estimated to account for 85% of GDP growth for the past three years, looks vulnerable to a slowdown.

“The closure of non-essential services such as malls, wet markets, roadside stalls and restaurants (only takeaways and deliveries allowed) to contain the coronavirus spread will affect spending.

“These measures, along with already dampened consumer sentiment, may result in consumption growth easing significantly from the 7.6% pace set in 2019,” the report read.

Panjiva Research from Panjiva Inc noted that the drag to supply chains has been widespread, especially in the automotive sector, with Toyota Motor Corp, Nissan Motor Co Ltd and Fiat-Chrysler Automobiles, among others, having to cut production.

Carmakers are more exposed due to the lengthy, just-in-time nature of corporate supply chains.

The electronics industry, which includes Hon Hai Precision Industry Co Ltd and China Electronics Corp, was also identified early as a problem area in part due to the length of supply chains and importance of the industry in the initial outbreak region of Hubei Province.

“Nintendo Co Ltd was one of the first firms importing from outside that region to report problems, though the challenge was more to peripherals than consoles,” it said in a report.

Similarly, logistics has slowed down rapidly, noting the slowdown in Chinese exports has taken time to appear in trade data given shipping times involved and latency of data.

“We’ve already started to see a decline in seaborne shipments to the US west coast, while US total imports fell 7.5% year-on-year (YoY) in February, including a 21% drop in shipments in China.

“Air freight rates have also surged, exacerbated by a loss of belly-cargo capacity in passenger jets,” it noted.

However, many firms still don’t know the impact yet. The research house said its review of over 6,000 company conference calls from Jan 20 to March 4 showed 42.3% of firms mentioned the Covid-19, with a peak in the chemicals sector with 77.1%, alongside autos and tech hardware at 72.4% and 69.3% respectively.

“The latter two are not a surprise, the pre-occupation in chemicals may reflect the specificity of products and business-to-business nature of the industry,” it said.

Other lessons, the research house noted, are tariff lessons that come in useful, expedited deliveries becoming more important, second order effects beginning to be felt and retailers winning on sales but may lose in supplies, especially noting that health and personal care retailers are seeing good sales.

“Healthcare drawbridges are drawn up, earlier shortages will reverberate for weeks or months and there are improvements in some places,” said Panjiva Research in a statement.

A post-virus bounce back could mark a return to some old problems and may be a hangover for global trade policy.

“Chinese steel exports look set to surge — for example shipments by Baosteel Co Ltd to the US already surged 44% YoY in January and February combined — which could lead to a new round of US tariffs.

“Similarly, China may miss its commitments to increase purchasing from the US as part of the Phase 1 trade deal. Indeed, imports of products covered by the commitments were 59% lower than they should be in January,” it said.

The research house said so far, there is no sign of either side wanting or granting leniency.