Sharp contraction weakens consumption and investment

Some uplift seen for remainder of 2020, but not enough to engineer a sharp U-turn into positive territory for the year as a whole

by NUR HANANI AZMAN / pic by ARIF KARTONO

DOMESTIC consumption and investment activities from an annual perspective are expected to be weaker this year compared to 2019, a reflection of the sharp contraction in economic activities earlier this year.

MIDF Research economist Abdul Mui’zz Morhalim told The Malaysian Reserve (TMR) that the weak domestic consumption contributed to the decline in the services industry, which accounts for more than half of Malaysia’s economy, particularly in the second quarter of 2020 (2Q20).

“If we look at the sector breakdown of the GDP data in 2Q20, the economic sector which recorded the steepest decline was the construction industry.

“Construction activities plunged by -44.5% year-on-year in 2Q20, mainly due to the challenge faced by developers to restart and comply with the new standard operating procedures as well as disruptions in the supply of construction materials.”

On Tuesday, the World Bank again revised its forecast of Malaysia’s economic growth this year to -4.9%, down from an earlier estimate of -3.1%, as uncertainties on the speed of global recovery heighten.

Abdul Mui’zz said according to the World Bank, the recent downward revision to Malaysia’s economic growth takes into account the sharp contraction of GDP growth in 2Q20.

“In other words, the downward revision mainly reflects the expected contraction in Malaysia’s economic growth will be worse than the World Bank’s earlier projection.

“As such, we do not think the revision indicates any significant change to the current narrative, as the economic fallout this year is related to the Covid-19 pandemic that is affecting the global economy including Malaysia,” he said.

However, the reopening of the economy has led to a recovery in consumer and business spending in the past few months.

“To a certain extent, the improvement in business activity, particularly the trade-oriented sectors, was supported by the recovery in the external demand.

“Despite the recovery, the resurgence of Covid-19 cases remains a downside risk to domestic and external demand outlook.”

Abdul Mui’zz said the decline in the unemployment rate from 5.3% in May 2020 to 4.7% in July indicated an improvement in labour market conditions. Nonetheless, high level of unemployment rate will continue to affect spending outlook, he added.

Economist Dr Nungsari Ahmad Radhi said a -4.9 contraction would be better than anticipated.

He said the domestic part of the economy has gradually improved after the Movement Recovery Order was relaxed, showing signs of recovery.

“The externally dependent parts of the economy are still not out of the woods as global supply chains have still not normalised.

“That has affected manufacturing, as well as auxiliary services supporting it. Other external dependent services such as tourism and related services have also not recovered,” he told TMR.

Nungsari stressed that unemployment will remain a major problem.

“You need growth to create jobs and new jobs to absorb new supply, as well as those displaced by the slowdown we’ve experienced. This will continue to be a major challenge in the next few years.

“What we’ve seen is recovery on private consumption demand, as well as public consumption expenditures.”

But he said investments have not really recovered yet as investors need a clearer picture of the overall situation.

Net exports will likely be negative this year and its performance will depend on commodity prices and the normalisation of the global manufacturing supply chains and demand recovery globally.

OCBC Bank economist Wellian Wiranto sees a contraction of around 5% this year, due largely to the sharp impact sustained in 2Q20.

He said for the second half of the year, Malaysia should be seeing some relative uplift, but not enough to engineer a sharp U-turn into positive territory for the year as a whole.

“Overall, there will be sectors that continue to be weighed down by the pandemic, including in travel and hospitality.

“But the broader economy has started to stabilise on a more even keel of late, which is one reason why we no longer think there is an urgency for Bank Negara Malaysia to ease rates further,” he told TMR.

On the fiscal stimulus front, he said there appears to be relatively little need for another big gush of government spending as well, given the relative stabilisation of the economy.

“While the government has won itself some leeway by having temporary lifted the debt ceiling of 60%, we see it more as an emergency measure now to be used as needed should the global economic momentum weakens again unexpectedly.”

According to the Department of Statistics Malaysia, Malaysia’s economic activity outcome for 3Q20 is expected to improve, given the government’s various stimulus packages to support overall economic growth.

“With economic activities in Malaysia being reactivated, it has begun to show economic recoveries that were reflected by the macroeconomic indicators in July.

“This scenario has attributed to the increase in total labour force at 15.82 million persons in July 2020 from 15.76 million persons in the previous month, and the unemployment rate dropped to 4.7% as against 4.8% in the preceding month,” said chief statistician Datuk Seri Dr Mohd Uzir Mahidin in a statement yesterday.