Did Malaysia’s economy escape contraction in 1Q20?

The country expected to post marginal growth of 0.8% in 1Q20 on solid February figure, says analyst

by ASILA JALIL/ graphic by MZUKRI

MALAYSIA’S economy is expected to register the steepest quarterly drop in a decade as the coronavirus pandemic hammered global growth, destroyed demands and forced stay-at-home orders worldwide.

The third-largest economy in South-East Asia is expected to escape a contraction with growth of just below 1% in the January-March period after expanding 4.5% in the same quarter a year ago.

The first quarter (1Q20) growth drop will be the slowest for Malaysia since the 2009 global financial crisis (GFC) and after a 3.6% rise in the challenging final three months of 2019, but a contraction is unavoidable in 2Q.

Covid-19, which was first detected in Malaysia in late January, has forced our nation of 32 million people to stay indoors, shutter businesses, tank manufacturing and lock the borders to outsiders.

Phase 1 of the Movement Control Order (MCO), which started on March 18, had destroyed consumer demand and the tourism sector, while the deteriorating global economy added to Malaysia’s economic woes.

MIDF Amanah Investment Bank Bhd economist Mazlina Abdul Rahman said economic activities had been significantly dampened by the pandemic and the MCO.

Despite all the gloom, she said a solid February figure would fuel the country to post a marginal growth of 0.8% year-on-year (YoY) for 1Q20, the lowest growth since the GFC.

“Distributive trade, which reflects consumption in the country, grew by 5.6% YoY in the first two months of the year, which is higher than 5.4% YoY in 4Q19. Similarly, industrial production increased by 3.2% YoY during the same period compared to 1.3% YoY in the final three months of 2019.

“On the external front, net exports expanded by 1.5% YoY in 1Q20 compared to a contraction of 1.8% YoY in 4Q19, contributing positively to the economic growth,” she told The Malaysian Reserve (TMR).

She said the “solid performances” in the first two months will cushion the overall impact of the pandemic, but the current quarter will be grim.

“For 2Q20, however, the economy is anticipated to record a severe contraction, probably larger than the levels seen during the GFC, mainly due to over a month of the MCO to contain the virus.”

The central bank is expected to announce 1Q20 GDP next week. The economic figures are highly anticipated after China and Hong Kong, which contracted to the worst levels since such data were recorded.

China’s GDP contracted 6.8% in 1Q20, the first contraction since the country began recording its quarterly figures in 1992. Hong Kong’s economy shrank 8.9% during the period, the worst quarterly drop since such data were recorded beginning 1974.

South Korea’s economy also contracted 1.4% in 1Q20, the biggest drop recorded since 2008.

But neighbouring Indonesia managed to avoid a contraction, expanding 2.97% in 1Q20. The growth, though, is still the “weakest pace” since 1Q01.

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff projected the domestic economy to shrink between 2% and 3% for 1Q20 due to the lack of trading activities between Malaysia and China and the nationwide MCO.

He said the lockdown in China had dramatically reduced trading activities and decreased Chinese tourists to Malaysia.

“For example, it was estimated that our hospitality industry suffered RM6 billion in lost revenue early this year.

“Secondly, when we ourselves started to impose our own MCO on March 18, this further slowed our domestic economic activities for 1Q20,” he told TMR.

Ahmed Razman said the government should now shift its focus to ways to revive the economy without neglecting the need to manage the health crisis.

He said the government has to be on the ground to understand public’s needs and the plight of businesses, especially small and medium enterprises.

“At the same time, a continuous campaign should be carried out to encourage people to spend based on their need and control the habit of borrowing.

“Alternative financing such as equity financing should be offered to businesses. In the long run, a reform of the monetary system should be undertaken by replacing fiat money with commodity-backed currency, introducing sovereign banks to limit credit creation by commercial banks and the use of a netting system in reducing government banks.”

Malaysia is expected to plunge into recession this year with some analysts putting the contraction between -2% and -6%. The nation’s economy grew 4.3% last year despite the long-running US-China trade war.