by NUR HANANI AZMAN / pic by TMR FILE
THE Socio-Economic Research Centre (SERC) estimates GDP to grow by 5.2% this year, an improvement from the estimated 3.4% in 2021, but lower than the government’s projection of 5.5% to 6.5% following weaker private consumption.
SERC ED Lee Heng Guie expects private consumption to recover, but there are some headwinds, mainly inflation risk and high cost of living.
He also foresees households to start rebuilding their savings and balance sheets, which will have an impact on GDP growth.
“Bear in mind the government’s GDP forecast for 2022 was done last October during the Budget 2022 announcement. Since then, there have been some developments, especially the unexpected pick-up in inflation risk and the worst floods in the country since the 2014-2015 floods.
“The worst floods in decades in some states have tempered the recovery in late December 2021 and early 2022. The government is expected to spend RM1 billion to repair damaged infrastructure due to the floods nationwide,” he told reporters after SERC’s online media briefing on Malaysia’s quarterly economic tracker (October-December 2021) and 2022 outlook yesterday.
According to Lee, private consumption is expected to grow at 5.9% in 2022, which is lower than the government’s forecast of 7.3%.
Nevertheless, two years into the Covid-19 pandemic, the Malaysian economy was seen coming out of the trough in the third quarter of 2021 and is on the path to recovery this year, supported by the reopening of economic and social sectors, said Lee.
“We expect exports to normalise to an estimate of 1.8% in 2022 (estimated 24.5% in 2021) as growth will moderate from a high base level averaging RM102 billion per month in 2021.
“There remains a lingering uncertainty over global growth due to the Omicron variant, while global supply chain disruptions are also likely to persist into the first half of 2022 (1H22), in time for bottlenecks to ease and production capacity to ramp up. The shortage of workers and increased cost of raw materials also dampened the pace of production,” he added.
Five Major Risks
Lee noted that the local economy is facing five major risks this year, namely Covid-19 contortions, the US Federal Reserve policy headwinds, China’s economic slowdown, price pressure and the winding down of domestic relief measures and policy changes.
He was cautious that the fast-spreading Omicron variant may temper the overall global recovery and drag Malaysia’s external sector.
Lee added that rising inflation risks signalled three rate hikes in 2022, where the rate hikes in the US will have a spillover effect on Malaysia via financial channels and a weaker ringgit against the US dollar.
“China’s economic slowdown struggling with real estate woes and fallout from sporadic Covid-19 lockdowns dampen demand for minerals and commodities. A 1% decline in China’s GDP could shave Malaysia’s growth by 0.3% to 0.5%.
“Price pressure will impact higher input costs, supply constraints and shortage of workers, as well as a higher cost of living.”
Lee also expects the one-off Cukai Makmur announced in Budget 2022 to post downside risk to corporate earnings and reduce companies’ dividend payments or payouts.
BNM to Raise OPR in 2H22
Lee is of the view that Bank Negara Malaysia (BNM) will raise the Overnight Policy Rate (OPR) by 25-50 basis points up to 2% or 2.25% in the 2H22.
“BNM is set to raise interest rates in the 2H22 though the timing will depend on the growth trajectory and inflation risk. A removal of monetary accommodation is needed to rebuild buffers, with hikes in baby steps so as not to temper the country’s recovery.
“A prolonged period of low interest rates can induce financial imbalances by reducing risk aversion of banks and other investors.”
Lee estimates inflation to increase by 3% in 2022, higher than the forecast of 2.5% last year. Headline inflation, as measured by the Consumer Price Index, had consistently climbed higher to 3.3% in November 2021, marking four months of continuous rise from 2% last August.