Recession imminent with MCO extension

The Prihatin package is likely to cushion the decline in GDP by as much as RM50b of the projected best-case scenario GDP in 2020


THE extension of the Movement Control Order (MCO) without some easing in measures could deepen the economic recession in Malaysia as production and trade would struggle to recover until 2021.

The Malaysian Institute of Economic Research (MIER) highlighted that any prolongation of MCO after April 28 could cost a 2% contraction of GDP growth.

MIER chairman Tan Sri Dr Kamal Salih (picture) said 98% manufacturing and businesses may not fully recover by the fourth quarter of 2020 (4Q20) and 1Q21 as well.

“However, under our best-case scenario (most optimistic), we project economic activities including trade and investment to fully rebound by the 3Q20 and further strengthen through 2021.

“Under the best-case scenario, Malaysia real GDP in 2020 is likely to grow by 3.8% relative to 2019 or -0.29% from the 2020 baseline,” he added.

This is in line with both Bank Negara Malaysia and World Bank expectations for Malaysia in 2020. In contrast, under the MIER worst-case scenario, real GDP is projected to contract by 1% relative to 2019 and -4.9% relative to the 2020 baseline.

For both scenarios, MIER took into account the total of the government’s Prihatin stimulus package of RM260 billion, with the supposition that only 20% of the non-fiscal injection (RM225 billion) will be realised into new capital formation across the economy.

As for 2021, Malaysia’s GDP is projected to grow further by 5.2% and 4.3% for the best-case and worst-case scenarios respectively.

In real value terms, this is 8.23% and 4.1% higher respectively, than the 2019 levels.

The stimulus package is likely to cushion the decline in GDP by as much as RM50 billion or 3.6% of the projected best-case scenario GDP in 2020.

Kamal said he also presumes the MCO will be gradually lifted, but with strict measures such as the six requirements stipulated by the World Health Organisation.

“The gradual economic opening over the ensuing six months will cushion the recessionary impact that many authorities including the International Monetary Fund, the World Bank and Fitch Ratings Inc, to name a few, expect this year.

“On the other hand, a premature economic opening (without the strictest of containment protocols), may lead to the risk of infectivity. This is not an easy trade-off for the government,” he added.

As the economy plummets between MCO Phase 1 and 3, Kamal further assumes disequilibrium in the Malaysian labour market for 2020 and 2021.

As for the job market, under the best-case scenario, he said the Prihatin package and near-full recovery is expected to prevent job losses markedly by 1.05 million (from

1.08 million to 28,600 workers). Meanwhile for the worst-case scenario, job losses are projected to decline from 2.41 million to 1.46 million (or 955,266 jobs being protected).

In terms of unemployment, if Malaysia’s real GDP shrinks about 6.9% relative to the 2020 baseline, the number of job losses (presumably mainly non-salaried jobs) could be 2.4 million, 67% of which are unskilled workers.

Kamal also believes with new capital-technology injection and productivity increases, there is a larger scope for GDP growth in 2021 should the Covid-19 pandemic subsides in Malaysia and worldwide, particularly within Malaysia’s main trading regions.

“MIER has in the pipeline through its Crouching Tiger Initiative a number of bankable investment bids on various industries, ranging from food security, 5G technology, electric cars, financial services, manufacturing and physical infrastructure development.

“To illustrate, we simulated an implementation of food security projects with the capital expenditure at RM87 billion and 5G technolog adoption (RM15 billion), coupled with 0.5% increases in technical efficiency among skilled labour and intermediate inputs,” he said.