Reopening of economy, private consumption power GDP

THE reopening of the economy and recovery in private consumption has given Malaysia’s GDP performance a boost.

According to United Overseas Bank (M) Bhd’s “Global Economics & Markets Research” report on Wednesday, the recovery has to date bring about a robust 5.5% growth of GDP and 3.4 points contribution to overall growth in the first quarter of 2022 (1Q22).

In 1Q22, household consumption expanded by 5.5% as compared to above 6% during pre-pandemic periods.

The gradual reopening of the economy since August 2021 has also lifted Malaysia’s economy into positive territory since 4Q21.

“The growth is also driven by Aidilfitri festive spending, pent-up demand, and higher consumption of services,” the report reads.

The further easing of containment measures, higher vaccination rates and improving labour market conditions also led to the improved performance.

Nonetheless, private consumption has significant growth potential since customer purchasing habits have remained stable since the recovery and the strong tourism momentum.

Consumers have resumed dining in, travelling and sporting and other leisure activities, after two long pandemic years.

“Increased crowds also have been observed in restaurants and cafes, cinemas, shopping malls and social and recreational spaces,” it said.

Not only that, hotels have been struggling to keep up with demand as seen in the surge of hotel occupancy rates of 80% to 90% during the Labour Day, Aidilfitri and Wesak weekends.

This year, Malaysia’s air passenger traffic is forecast to increase between 197% and 347%, representing between 32.6 million and 49 million passengers.

“This marks a 30% to 45% recovery from the pre-pandemic air passenger traffic levels in 2019,” the report noted.

Despite the reopening optimism, analysts stay cautious, given multiple headwinds on the horizon that could taper the momentum of private consumption growth to around 6.5% in the second half of 2022 and 2023.

“The key risk includes higher global uncertainties, rebalancing of household expenditure amid weaker household balance sheets and expiry of pandemic policy measures by mid-year, coupled with a higher cost of living and interest rates,” it said.

Not only that, the spike in interest-free instalment plans and financing options such as buy now, pay later (BNPL), although good to spur consumption, poses the risk of users’ build-up excessive consumer debt.

The report noted that BNPL growth is largely underpinned by the underbanked and unbanked population, which is estimated at 55% of population.

In addition, as a result of higher inflation and slower global growth, markets have started to price in the effects.

For example, on Tuesday, the World Bank cut its forecasts for global growth this year to 2.9% as compared to earlier forecast — 3.2% in April, 4.1% in January, amid the conflict in Ukraine, lockdowns in China, supply-chain disruptions and the risk of stagflation.

The economic fallout also has eroded a substantial portion of Malaysian households which led to an estimation of over RM140 billion being withdrawn from the Employees Provident Fund (EPF) retirement saving previously. 

The report noted that 6.1 million or around half of EPF members and 22% of the adult population have less than RM10,000 in their EPF accounts.

Therefore, this has a negative potential on household financial assets, raising concerns over the medium-term financial vulnerabilities of some household segments and spending power.

“Looking at the potential headwinds, we maintain our projection for private consumption growth at 6.5% (against official estimate of 9%),” it said.

The forecast consumption is based on quarterly data of private consumption, GDP trend growth and Covid-19 restriction periods.

Nonetheless, to counter near-term headwinds, analysts suggest a wider job opportunity for the consumer, higher incomes, and direct cash subsidies to consumers.

“However, this runs the risk of fanning demand-driven inflation pressures that will have to be managed with a larger quantum of rate hikes,” it concluded. — by NURUL SUHAIDI / pic MUHD AMIN NAHARUL