Malaysia’s GDP continues to decline

Headline inflation in 1Q21 increased to 0.5%, mainly due to base effect from fuel prices and lapse in impact from electricity tariff rebates


MALAYSIA’S economy continued to contract for the fourth consecutive quarter as the pandemic battered businesses and sent key economic sectors almost to a halt.

For the first quarter of 2021 (1Q21), the country’s GDP contracted by 0.5% amid the imposition of the second Movement Control Order (MCO) earlier this year.

Bank Negara Malaysia governor Datuk Nor Shamsiah Mohd Yunus (picture) said the narrower decline compared to 4Q20 was mainly due to the improvement in domestic demand and robust exports performance, particularly for electrical and electronics (E&E) products.

She said the less stringent containment measures during MCO 2.0 also contributed to the smaller GDP contraction.

“Despite the imposition of MCO 2.0, the 1Q21 GDP growth is better than expected. One important distinction between MCO 2.0 and MCO 1.0 is that all economic sectors were allowed to operate.

“Similarly, with all economic sectors to remain open in MCO 3.0, we do not expect it to significantly impact the overall growth trajectory to the extent seen in 2Q20,” she said during the virtual press conference yesterday.

Malaysia’s GDP had been in the negative territory since 2Q20, where the economy dipped to -17.2% due to the impacts of MCO 1.0. Most operations in the economic sectors were halted in the period.

In 3Q20, the economy contracted by 2.7% before declining further to -3.4% in 4Q20. Malaysia’s full-year economy tanked to -5.6% in 2020 compared to 4.4% in 2019.

Manufacturing sector grew 6.6% in 1Q21 (4Q20: 3%), driven by E&E and optical products, which registered a growth of 10.6%; and petroleum, chemical, rubber and plastic products (7.3%).

The growth of E&E and optical products was due to the higher demand of microchips in electronics devices.

The agriculture sector recorded a GDP of 0.4% (4Q20: -1%), mainly due to expansion in livestock, logging and forestry, and other agriculture subsectors.

Other sectors saw a slight improvement despite recording a contraction such as the services sector, which contracted 2.3% (4Q20: -4.8%), mining (-5%; 4Q20: -10.4%) and construction (-10.4%; 4Q20: -13.9%).

Improvement in domestic demand was mainly driven by private consumption, which posted a contraction of 1.5% (4Q20: -3.5%), influenced by the expenditure on essential items namely food and non-alcoholic beverages, housing, water, electricity, gas and other fuels and communication.

Private investment expanded to 1.3% (4Q20: -6.6%) as a result of higher capital expenditure, mainly in the services and manufacturing sector.

Meanwhile, public investment stood at -18.6% (4Q20: -20.4%) due to higher spendings on fixed assets by the government.

Headline inflation in the quarter increased to 0.5%, mainly due to base effect from fuel prices and lapse in impact from electricity tariff rebates.

Nor Shamsiah said the headline inflation is expected to average between 2.5% and 4% this year due to the cost-push factor of higher global oil prices, while core inflation is expected to remain subdued.

“Headline inflation is projected to temporarily spike in 2Q21 mainly due to base effect from the exceptionally low domestic retail fuel prices last year.

“More specifically, for the months of April and May, headline inflation may rise to between 6.5% and 7%. However, this will be transitory as headline inflation is expected to moderate below 5% in June and continue to moderate after as this base effect dissipates,” she said.

She said Malaysia is on track to achieve a projected growth of between 6% and 7.5% this year supported by external demand and domestic recovery.

The forecast made by the central bank took into account the uncertainties surrounding the pandemic which includes the potential resurgence in cases and tighter containment measures, she said.

She added that the central bank still has sufficient monetary policy space to further support the economy as the Overnight Policy Rate currently stands at 1.75%.

“Although there will be speed bumps, the economy is expected to remain on course for recovery,” Nor Shamsiah said.