Private sector continues to drive economic growth

This is subject to the movement restrictions as the spread of the new virus strains had restricted spending in the private sector


PRIVATE sector spending will continue to be among the main drivers for the economic growth during the recovery phase as restrictions are eased in the second half of the year (2H21).

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the current movement restrictions due to the spread of the new virus strains had also restricted spending in the private sector.

“In term of willingness and ability to spend, the private sector is ready for it. As it is now, the amount of cash being circulated has been quite substantial, judging from the M1 growth.

“So, I think the private sector would continue to propel the continued economy subject to the human mobility constraint,” he told The Malaysian Reserve recently.

He said Bank Negara Malaysia (BNM) may also keep a close watch on the vaccination programme which will determine the pace of the reopening of the economy.

This would allow the central bank to gauge if there is a need to reduce the Overnight Policy Rate (OPR) further given the fiscal space it still has at the current rate of 1.75%.

“They may or may not want to reduce it. The key question is the marginal effect of further cut in the OPR. Will it result in more economic activities? Or is there something else that stops economic activities to be more lively,” he added.

Malaysia’s gross domestic product (GDP) expanded 16.1% in the second quarter of 2021 (2Q21) compared to the low base recorded in 2Q20 where the GDP contracted 17.1% mainly due to the first phase of movement restrictions.

On a quarter-on-quarter seasonally adjusted basis, the GDP contracted 2% from 2.7% in the preceding quarter. In a press briefing last Friday, BNM governor Datuk Nor Shamsiah Mohd Yunus said economic activity picked up in the beginning of the quarter and the growth was mainly supported by improvement in domestic demand and continued robust exports performance.

Economic activities, however, slowed down further in the quarter due to the reimposition of containment measures under Phase 1 of the National Recovery Plan (NRP).

Headline inflation rose to 4.1% in 2Q21 mainly due to the base effect from fuel prices, as well as the lapse in the effect from the tiered electricity tariff rebate. Core inflation remained stable at 0.7% in the quarter.

Most sectors showed continued improvement in 2Q21, led by manufacturing and services which recorded an annual change of 26.6% and 13.4%, respectively.

Growth was driven by higher private sector spending where private consumption rose 11.6% in 2Q21 compared to 2Q20, and private investment rose 17.4%. Strong trade activity also supported economic growth as net exports rose 34.3% year-on-year.

The central bank had also revised down its GDP forecast to between 3% and 4% for this year compared to its previous projection of between 6% and 7.5%.

“The downward revision reflects the impact from the nationwide implementation of the Full Movement Control Order (FMCO).

“On a seasonally adjusted quarterly basis, Malaysia’s GDP is expected to trough in 3Q21 before returning to pre-pandemic levels in 4Q21,” she said.

Chief statistician Datuk Seri Dr Mohd Uzir Mahidin said the level of economic value in 2Q21 remained lower than the pre-pandemic level of 4Q19.

In terms of monthly GDP performance, April and May rose to 40.1% and 19.8%, respectively, before slipping to 4.4% in June influenced by tighter movement restrictions.

Malaysia’s economy grew by 7.1% in 1H21 (1H20: 8.4%).

OCBC Bank economist Wellian Wiranto said the slash in full-year GDP projection may be a prelude to a potential cut in the policy rate in September.

“Taking the various moving parts into account, we continue to see a better-than-even chance of BNM cutting its OPR benchmark by 25 basis points when the Monetary Policy Committee meets next on Sept 9.

“While it did keep its rate unchanged in July despite the challenging situation even then, we argue that the economic conditions have not improved enough to warrant a longer wait-and-see stance,” he said in a note recently.

He noted that even if the economy rebounds in the 4Q, the protracted lockdown that the country has been experiencing has badly hurt the growth in 3Q which requires some form of easing.

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz (picture) said in a statement last week that the government anticipates a much more challenging 3Q due to the Enhanced MCO enforced at some parts in Klang Valley in July, coupled with the prolonged Phase 1 of the NRP.

“However, this prospect will be balanced out by the easing of restrictions to fully vaccinated individuals and states that have transitioned to Phase 2 and 3.

“The prospects for 4Q are expected to improve supported by the gradual reopening of the economy where we will see more economic and social sectors will be allowed to operate as more people are inoculated,” he said.