Consumer price inflation will likely be muted over the near term due to the marked decline in global oil prices and overall demand since March
by DASHVEENJIT KAUR/ pic by MUHD AMIN NAHARUL
THE World Bank has downgraded its growth forecast for Malaysia to -3.1% this year compared to -0.1% in April, with the near-term outlook appearing unexpectedly uncertain due to Covid-19 pandemic.
Based on World Bank Malaysia’s latest economic monitor, the contraction in growth is due to a sharp slowdown in economic activities resulting from Covid-19 and measures to contain its spread.
Lead economist Richard Record said the near-term outlook, however, is unusually uncertain at present.
“The growth is expected to resume in 2021 at 6.9% as the outbreak eases,” he said when presenting the report titled “Surviving the Storm” on Facebook live yesterday.
The report highlighted that aggregate investment had contracted for the fifth consecutive quarter by 4.6% in the first quarter of 2020 (1Q20) compared to a contraction of 0.7% in the last quarter of 2019, with broad-based weaknesses in both private and public investment.
Due to weak external demand, World Bank said Malaysia’s exports of goods and services declined for a third consecutive quarter by 7.1% in 1Q20 (4Q19: -3.4%), the largest decline since the Global Financial Crisis in 2009.
Muted Price Inflation
Meanwhile, private consumption moderated to 6.7% in the first three months of the year, down from 8.1% in 4Q19, largely reflecting the substantial impact of Covid-19 and the Movement Control Order on retail, travel, leisure and recreational spending and consumption of durable goods during the previous period.
Record said the pandemic, coupled with a changing world of work also raises the need for a more enhanced social protection system in Malaysia.
“The government responded to the economic impact of the pandemic with two rounds of the Prihatin Rakyat Economic Stimulus Package in February and March 2020, and more recently the short-term National Economic Recovery Plan (Penjana).
“Higher public spending coupled with declines in fiscal revenues, however, has led to a narrowing of fiscal space,” he added.
Therefore, he believes, reallocating expenditures towards priority areas, identifying new sources of non-tax revenue and amending statutory limits on borrowing could help to temporarily expand fiscal space.
“The government’s stimulus packages and Penjana have softened the impact of the Covid-19 pandemic and paved a path towards economic recovery,” he said.
The report also suggests the recovery of the external sector is likely to be relatively slow, consistent with the projected path of recovery in global trade.
“This year, Malaysia’s exports and imports are projected to contract sharply, by 12.9% and 9.2% respectively (2019: -1.1% and -2.3%) in the context of the dramatic collapse in global trade activities.
“A gradual recovery in Malaysia’s external sector is expected to begin in the second half of 2020 as the impact of the pandemic fades and gain momentum next year as global trade activities begin to normalise,” it said.
Record also stated that consumer price inflation would likely be muted over the near term due to the marked decline in global oil prices and overall demand since March.
“Inflation is expected to be close to zero percent on average,” he added.
Meanwhile, Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed said the government welcomed the findings and recommendations of the newly released World Bank Malaysia Economic Monitor.
“It provides a cogent analysis of the current economic challenges and will help inform our efforts to accelerate the post-Covid-19 economic recovery process,” he said during the fireside chat by the World Bank Malaysia.
World Bank Group representative to Malaysia and country manager Dr Firas Raad said social-protection measures are needed to help vulnerable Malaysians survive the current economic storm and thrive in a new post-pandemic reality.
“Protecting livelihoods is important so that those who have lost their jobs and businesses can get back on their feet and contribute to Malaysia’s economic recovery,” Firas said.
World Bank’s Recommendations
The report recommends that in the near term, government efforts should focus on supporting relief and recovery efforts by deepening social assistance for lower-income households, improving the delivery of social protection programmes and promoting job recovery.
As the recovery continues, the report noted that further rounds of cash transfers would remain vitally important to mitigate acute financial strains among the most vulnerable groups in the Malaysian society. It would also support domestic consumption and human capital development during a severe economic downturn.
“Over the medium- and long- term, support for lower-income groups can be gradually expanded to ensure that Malaysia’s social protection system provides a minimum level of protection to all households and individuals in need.
“This goal is well aligned with the country’s own shared prosperity agenda and the equity outcomes of many high-income and developed nations which Malaysia is also aspiring to achieve,” the report noted.
The bank also suggested that the quantum of the financial assistance in the Prihatin package and Penjana plan may need to be increased.
“While the measures included in the Prihatin package could help lessen the near-term disruptions on vulnerable households and businesses, the package implicitly assumes that the crisis will pass within a few months.
“Given that it could take at least another one to two years for the economy to return to pre-Covid-19 conditions, additional financial assistance may be needed to protect the welfare of vulnerable households and to ensure the sustainability of small and medium enterprises,” it said.
Concurrently, Moody’s Analytic in its latest beeping believes as countries across the region ease restrictions at different rates, the economic recovery in the Asia-Pacific (APAC)-region is bound to be uneven.
Even still, chief APAC economist Steve Cochrane said economic growth is expected to turn positive across the region in 3Q20.
“We forecast a 1.9% decline in 2020 for the APAC GDP, well ahead of the anticipated 4.8% global downturn.
“In the long term, we anticipate APAC will outpace the rest of the world over the coming decade, as a large share of the globe’s growing middle class is located in the APAC-region, including South Korea, Taiwan and Vietnam which looks increasingly more attractive given their relative success in keeping Covid-19 contained,” he said.
Cochrane noted that Malaysia may achieve modest growth this year alongside Indonesia, but much depends upon an improvement in crude oil and other commodity prices, with the risks still to the downside.