Slight contraction of GDP in 3Q21


MALAYSIAN Rating Corp Bhd (MARC) foresees a slight contraction in gross domestic product (GDP) in the third quarter of 2021 (3Q21) given the economy is still reeling from intermittent lockdowns and the dissipating base effect. 

Its head of economic research Firdaos Rosli said firms operating capacity constraints saw the manufacturing Purchasing Managers’ Index remaining in the contraction zone (July 2021: 40.1). 

He said challenging operating conditions such as supply chain disruptions would continue to weigh on business investment. 

“Consumer sentiment hovered below the optimism threshold, mainly attributable to the elevated unemployment rate (2Q21: 4.8%). 

Even so, an early resumption of economic activities would be the saving grace in avoiding a double-dip recession in 3Q21,” he said in an economic research note. 

MARC expects headline inflation to ease to below 3% in 3Q21 as the base effect dissipates. 

“We opine that Bank Negara Malaysia (BNM) will hold the key Overnight Policy Rate (OPR) at a historical low of 1.75%, at least for the rest of the year. The current monetary settings are sufficiently accommodative. 

“Lowering the OPR will likely result in banks becoming more cautious in lending, more so following the announcement of a repayment moratorium,” he added. 

Firdaos believed the marked revenue shortfalls and increased expenditure will cause the fiscal deficit to breach the government’s target of 6% of GDP in 2021. 

“Instead, we think that the fiscal deficit could come in at least 6.5% of GDP. 

“The narrowing policy space and limited fiscal resources could push the government to temporarily raise the self-imposed statutory debt ceiling again, this time to 65%,” he said. 

He added that BNM’s significant downward revision of its GDP growth forecast for 2021 from 6%–7.5% to 3%–4% is a testament to Malaysia’s long and winding recovery path. 

MARC agrees with BNM’s revised forecast as its latest financial year 2021 projection falls within the range of 3.9%. 

“A more pronounced recovery could occur in 4Q21 as the economy reopens gradually. We see the near-term economic outlook remaining tilted to the downside amid intermittent lockdowns and untimely policy response. 

“Outbreaks of new viral variants, both internally and externally, could prolong the pandemic and threaten to weaken or delay recovery,” he added. 

MARC lauds the government’s rapid vaccine deployment in recent months, so achieving herd immunity by the end of October 2021 seems well in sight. 

“However, downside risks remain considering that 2.7 million or 11.9% of the adult population in Malaysia have yet to register for vaccination. 

“We believe that those unvaccinated are not only at high risk of spreading the Covid-19 virus but could also derail the National Recovery Plan in the coming months,” he said. 

Malaysia’s economy recorded a sharp turnaround of 16.1% year-on-year in 2Q21 compared to a contraction of 17.2% in 2Q20. 

Strong growth in early 2Q21 lost steam due to the stricter national lockdown imposed since late May, resulting in contractions in most industries and expenditure components. 

Overall, the economy grew at 7.1% in the first half of 2021 (1H21) from a decline of 8.4% during 1H20.