Economy to rebound between 6% and 7.5%

A rebound in global growth in 2021 will also drive a strong recovery in exports, particularly in E&E products, on the back of a technology upcycle

by NUR HANANI AZMAN / pic by TMR FILE

THE economy is expected to rebound from the second quarter of 2021 (2Q21) and return to pre-pandemic levels by mid-2021.

Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus said the GDP is projected to expand between 6% and 7.5% in 2021 compared to a contraction of 5.6% in 2020, as a result of various factors including domestic consumption and a brighter external environment fuelled by vaccine rollout.

She said a rebound in global growth in 2021 will also drive a strong recovery in exports, particularly in electrical and electronics (E&E) products, on the back of a technology upcycle.

“Private consumption will be supported by a gradual improvement in labour market conditions amid relaxation of containment measures, improving consumer sentiment from the vaccine rollout and continued policy support that remains available particularly for vulnerable households.

“Investment activity is expected to pick up following the lifting of movement restrictions and favourable external demand conditions,” she told a virtual press conference on BNM Annual Report 2020 yesterday.

BNM also anticipated progress in multi-year infrastructure projects, such as the East Coast Rail Link (ECRL), Mass Rapid Transit 2, Light Rail Transit 3 and the Pan Borneo Highway.

“We expect the positive growth momentum to be sustained into 2022, supported by further expansion in global growth.

“As we reach herd immunity, pent-up demand particularly in leisure and travel-related spending will further lift the recovery,” Nor Shamsiah said.

Deputy governor Datuk Abdul Rasheed Ghaffour said the risk outlook remains on the downside mainly due to uncertainties caused by Covid-19 and potential challenges that might affect the rollout of vaccines both globally and domestically.

Citing the blockage of the Suez Canal as an example, he said commodity supply shocks can happen anytime and anywhere, which could impact global trade.

“If this downside risk materialises, growth is likely to be closer to the lower bound of our forecast range.

“On upside potential to growth, favourable development surrounding the distribution and effectiveness of the vaccines could also lift sentiments and consumption spending, which in turn could accelerate the rollback of containment measures.

“This would also lift income and promote a faster recovery in the high-touch sectors, such as tourism and services,” he added.

Movement restrictions and weak sentiment due to pandemic fear were the major impediment to consumer spending last year, and the crisis also contributed to high unemployment and underemployment.

Nor Shamsiah said the expected easing of movement restrictions and the vaccine rollout throughout the year should also support the rebound in consumer spending.

“When we talk about overall consumer spending, we need to look at the key driver which is income. So, we do expect broad income conditions to improve given the pick-up in domestic economic activity and continued strength in external demand.

“Beyond income, some households can also leverage their liquid financial assets. There could be additional support through spending from excess savings.

“Savings by individuals increased by almost 20% between March and December 2020,” she said.

Meanwhile, the country’s headline inflation is anticipated to temporarily spike to above 5% in 2Q21 due to a lower base from low fuel prices in 2Q20, and average to between 2.5% and 4% for 2021.

Headline inflation, which measures the total inflation within an economy, including commodities such as food and energy prices, was -1.2% in 2Q20 where the country went into a complete lockdown to curb the spread of the Covid-19.

Last year, the pump prices in Malaysia were about RM1.37 versus RM1.95 this year. Hence, the spike is temporary.

The government has set the ceiling price for RON95 petrol at RM2.05 and RM 2.15 per litre for diesel.

“Core inflation, however, is expected to remain subdued, between 0.5% and 1.5% this year. Core inflation measures the change in average consumer prices after excluding from the index certain items with volatile price movements such as fuel price,” Nor Shamsiah added.

As for the impact on the government’s fiscal position, she said higher global oil prices will result in higher revenue collection following more conservative assumptions on global oil prices adopted in the 2021 Budget.

Read our previous report here