CLICK TO ENLARGE
KUALA LUMPUR: Bank Negara’s gross domestic product (GDP) forecast of between 5.3% and 6.3% for this year is set to be anchored by private sector growth as the country transitions towards endemicity.
The forecast, which is slightly lower than the earlier projection of 5.5% and 6.5% announced in Budget 2022, is realistic and achievable, according to TA Research.
“The outlook comes as Malaysia further eases virus curbs and aims to treat Covid-19 as endemic.
“The country will fully reopen its borders to international visitors from today and will waive quarantine requirements for the fully vaccinated, a move that potentially boosts tourism and the labour market,” it said in a report yesterday.
It is firming its 2022 GDP projection at 6%, taking into consideration the positive developments surrounding the country’s Covid-19 situation.
“Apart from the high vaccination rates and swiftly rolled out booster doses, we foresee continued expansion in domestic demand following the full upliftment of containment measures, reopening of international borders as well the multiplier effect from higher minimum wage.”
CGS-CIMB Research is maintaining its GDP forecast at 5.6%, despite the central bank’s downward revision.
“According to Bank Negara, key supports this year are aplenty, namely the continued expansion of external demand, full lifting of Covid-19 quarantine and travel restrictions, labour market improvement, strong increase in investments in manufacturing as well as continued targeted policy measures.
CGS-CIMB Research also noted that Bank Negara is more optimistic about the domestic growth trajectory, as it projects private consumption growth of 9% for this year.
“A factor that drives its optimism is the expectation of a robust increase in pent-up demand following the drawdown of excess savings. Bank Negara estimated the stock of excess savings at between RM60bil and RM80bil as at end-2021, with households having the tendency to spend 25% of it.
“Moreover, the central bank also indicated that the recent approval to allow Employees’ Provident Fund (EPF) contributors to withdraw from their EPF accounts is projected to add between 70 basis points and 90 basis points to private consumption growth, assuming a conservative estimate of less-than-RM20bil in EPF withdrawals.”
Centre for Market Education chief executive officer Carmelo Ferlito, meanwhile, said projecting GDP growth in the beginning of the year is “meaningless.”
“The focus should instead be the qualitative composition of the GDP. For example, if we look at 2021, the GDP growth was mainly built on private consumption that was driven by subsidies and government spending. Private investments, meanwhile, were flat.
“So at the end of the year, the number was positive and there was growth, but GDP growth driven by consumption and government spending has potential negative consequences, like inflation.”
CGS-CIMB Research cautionrd about the potential for second-round effects of inflation where wages and prices begin to rise following the first round of inflation.
In its engagement with analysts, the research house said Bank Negara wanted to see evidence of inflation leading to wage pressures and subsequently, a second-round effect stemming from the demand side.
“Hence, indicators such as wage growth, inflation expectations and persistent increase in core inflation should be monitored closely.
“Nevertheless, Bank Negara guided that any monetary policy change will be gradual given the significant downside risks. Overall, we still maintain our expectation of two 25 basis point rate hikes in the second half of 2022.”
According to the central bank, headline inflation moderated to 2.2% in February from the 2.3% recorded in January, reflecting lower inflation in the transport segment at 3.9% from 6% in January.
Underlying inflation, as measured by core inflation, meanwhile, was higher at 1.8% during the month compared with 1.6% in January.
Bank Negara has forecast headline inflation to hover between 2.2% and 3.2% in 2022, from 2.5% in 2021.
Core inflation is expected to be in the range of between 2% and 3%.
According to Bank Negara, country-specific factors suggest that overall consumer inflationary pressures are likely to be relatively manageable in the medium term, given some structural and policy factors.
Hong Leong Investment Bank (HLIB) agreed with Bank Negara’s assessment that the increase in inflation is a reflection of cost push pressures.
There is no necessity for the central bank to react with higher interest rates, considering that the country is still in the early stages of recovery, according to the research house.
“We believe the inflation dynamics in Malaysia is dissimilar to the one we observe in the US economy, where labour demand exceeds unemployed people leading to a jump in wages,” said HLIB.