Economic rebound in 2H20 remains weak on low spending and investment

Better showing in 2H20 GDP expected as key economic indicators improved in the May-July period


MALAYSIA’S weak consumer spending and cutbacks in public and private investments, due to economic damages wrought by Covid-19, heighten growth risks in the second half of the year (2H20), observed an economist.

Dr Nungsari Ahmad Radhi said even though domestic economic activities have largely resumed, but both consumption and especially investments are still well below normal.

“Businesses have not recovered, some have gone under and new investments are being put on hold as businesses are on survival mode and confidence is still not there. We will see subpar performance for some time.

“Third-quarter 2020 (3Q20) GDP should look better than 2Q20, but still down on a year-to-year comparison to 2019,” he told The Malaysian Reserve.

The 2Q20’s -17% GDP was worse than the contraction during the 1998 Asian financial crisis and Nungsari opined this was not surprising.

“As bad as the numbers were, I am in fact positively surprised as I thought it would be worse. Malaysia is highly dependent on trade and all trade have been affected. That explains why we performed worse than the likes of Thailand.”

The South-East Asian region’s economy contracted in 2Q20 as countries tightened their belts on spending. Thailand’s economy contracted the most in more than two decades as GDP shrank 12.2% from a year ago.

PNB Research Institute Sdn Bhd CEO Intan Nadia Jalil said the country’s nominal GDP (measured in purchasing power parity and US dollar) has always been smaller than Thailand’s, but given that the latter’s population more than double Malaysia’s, its GDP per capita is about 70% of Malaysia’s.

“Referring to both countries’ GDP growth rates in 2Q20 (Thailand: -12.2%, Malaysia: -17.1%), the key differentiating factor was that Thailand saw a surge in public investment spending during the quarter, at its highest rate in four years.

“This was mainly driven by delayed public infrastructure investments in water management and transport and logistics, which was in turn due to a five-month delay in the passing of its budget bill.”

By contrast, Malaysia’s public sector spending fell for the second consecutive quarter during the same period, said Intan Nadia.

“What this highlights, perhaps, is the importance of public-sector spending for economic performance, especially productive public investments, when private sector activity is muted.”

In contrast, Malaysian Institute of Economic Research former ED Prof Emeritus Datuk Dr Zakariah Abdul Rashid expressed optimism that the reopening of the economic activity will be reflected in the economic growth in 2H20.

“The whole year’s performance has been dented, especially because of the 2Q20 figure. Therefore, we can’t conclude the year’s performance by just looking at the abnormal, the anomaly, performance.”

Public Investment Bank Bhd head of research Ching Weng Jin said disposable income and cashflow will be an issue over the next couple of months.

“The recovery path is going to be rocky, especially when the confidence isn’t all that fantastic. I don’t think private consumption will tank any further. But it’s not likely to recover in a hurry.”

Maybank Investment Bank Bhd expects better showing in 2H20 GDP as key economic indicators like Manufacturing Purchasing Managers’ Index, external trade, retail trade volume, together with mobility indicators, improved in the May-July period.

Its chief economist Suhaimi Ilias said this led to recovery from mobility loss, reopening of businesses/ industries, resumption of supply chain from earlier disruption, as well as some releases of pent-up demand/spending.

He said the short-term National Economic Recovery Plan contains measures to spur domestic demand in 2H20.

“Our projected real GDP rebound next year from recession this year is ‘conservative’ relative to Bank Negara Malaysia’s figure in view of the still uncertain and fluid recession-recovery path.

“Plus the overhang in domestic politics due to the Perikatan Nasional government’s razor thin majority in Parliament which raises questions about political stability and the risk of a no confidence vote and in passing legislations amid rumours of a snap general election around the corner,” he said in a research note.