Malaysia braces for 5th consecutive GDP contraction

Economic contraction in 2Q21 will likely be wider at between 5% and 8%, says an analyst, compared to a decline of 0.5% seen in 1Q21


MALAYSIA could see its fifth consecutive quarter of economic contraction in the second quarter (2Q21) due to the implementation of a full lockdown, falling short of the government’s optimistic economic growth projection.

After efforts to reduce the positive Covid-19 cases through the third Movement Control Order (MCO 3.0) fell through, the government announced a “total lockdown” with more businesses being ordered to temporarily close to alleviate the rising cases, while giving some time for the public healthcare to stock its equipment.

On May 29, Malaysia hit its highest daily toll reported since the start of the pandemic with 9,020, increasing the necessity for ventilators and intensive care unit beds, as well as adding pressure on the public healthcare system.

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff said the economic contraction in 2Q21 will likely be wider compared to a decline of 0.5% seen in 1Q21, while expecting it to be between a decline of 5% and 8%.

“I believe Malaysia could dodge the collapse of the economy as seen last year because many businesses this time around have been preparing well by changing their business model towards digitalisation and automation.

“Also, this time some sectors are allowed to operate and when the government announces their latest fiscal stimulus package, the affected parties will be given the needed assistance.

“However, I do think the central bank needs to review its forecast of 6% to 7.5% economic growth. Based on the latest situation, a realistic target should be around 5%,” he told The Malaysian Reserve (TMR).

The government announced last Friday that the full lockdown will be extended for another two weeks until June 28, as there has been no significant reduction in daily new cases.

Senior Minister (Security Cluster) Datuk Seri Ismail Sabri Yaakob, however, said on Sunday that the government may review the standard operating procedures (SOPs) for MCO 3.0 if the daily cases fall below 4,000 — based on a target set by the Ministry of Health (MoH).

Universiti Kuala Lumpur Business School economic analyst Assoc Prof Dr Aimi Zulhazmi Abdul Rashid said even though GDP growth in March was reported at 6%, further catalysts are needed to keep up with the initial projection of economic growth.

“MCO 3.0 lockdown does not fully embrace the MCO 1.0 practices as businesses in the critical areas have learned fully the importance to follow the SOPs.

“Those essential manufacturing companies are only allowed to operate at 60% attendance of employees. Certainly, if new clusters still emerge from those identified essential manufacturers, a full shutdown will be implemented.

“I think the contraction of 17.1% GDP growth seen last year will not be repeated. However, the domestic economic recovery will be hampered again and may hold the real GDP growth marginally in the negative territory,” he told TMR.

Aimi Zulhazmi said while the country’s unemployment rate dropped slightly to 4.8% of the total labour force in February, it will be difficult to maintain the positive trajectory with the lockdown.

“Unemployment has been reported to be improving. However, this improvement will be challenging to maintain as the economy is in slow growth once again.

“Many of the small and medium enterprises (SMEs), which were about to move into the positive sphere, will now have to review their business strategies as recovery will take a longer time than anticipated.

“The assistance announced in the Pemerkasa+ would only help to extend their lifespan, but without concrete plans from the government to provide long-term solutions, the future of the affected economic sectors will look uncertain,” he said.

Ahmed Razman believes the country’s unemployment rate will remain high and will likely surpass 4.8% for June.

“The number of employed individuals also might be decreasing and greater negative impact will be seen on the number of own-account workers.

“But it will not be a drastic change due to a decision by the government to allow some of the sectors to be opened,” he said.

On the upside, despite the lockdown, Malaysia’s economy will be rescued by continuing export demand for electrical and electronic products, palm oil, gloves and good oil prices, which will provide strong contributions to the GDP, said Aimi Zulhazmi.

“The approach this time looks more on the balance of health, trying to curb the rapidly rising daily infection rates, thus economic issues are put to bed and only critical sectors are allowed to operate with minimum manpower.

“The objective is to reduce people’s movement and theoretically stop the infection from continuously spreading.

“It also follows MCO 1.0, which had been regarded as successful in bringing down the cases to null.”