PETALING JAYA: While the risk of recession remains low for Malaysia, the domestic economy may have started the year on a weak footing.
In the first quarter of 2022 (1Q22), supply chain disruptions, global macroeconomic challenges and labour shortages have continued to bog down the Malaysian economy.
Economists are mixed on the projected growth rate of Malaysia’s gross domestic product (GDP) in 1Q22, with a Bloomberg poll anticipating a median growth rate of 3.3% year-on-year (y-o-y).
Some economists also anticipate the possibility of a contraction in the first quarter, after the country’s GDP expanded by 3.6% y-o-y in the fourth quarter of 2021.
Bank Negara is scheduled to release the GDP figures for 1Q22 this Friday.
Professor Paolo Casadio of HELP University forecast the domestic economy to contract marginally by 0.7% y-o-y and 1.5% quarter-on-quarter (q-o-q).
In a reply to StarBiz, Casadio said the economy would be dragged down by a contraction in investments, negative net external demand and a stagnation in private consumption.
Professor Paolo Casadio of HELP University forecast the domestic economy to contract marginally by 0.7% y-o-y and 1.5% quarter-on-quarter (q-o-q).
“The expected contraction in the q-o-q figure is also likely because of the huge q-o-q growth in 4Q21 (6.6%) and the low quality of this growth mainly reflecting the public intervention in the economy.
“I do not see a clear pattern in private consumption and investment, which would be consistent with a positive transition of the economy toward a systematic and sustained recovery,” he said.
Professor Geoffrey Williams of Malaysia University of Science and Technology, who also anticipated a contraction in 1Q22, noted that Malaysia’s potential GDP growth had decreased in the last two years.
This was largely due to insufficient investments, in particular private investment. This in turn has reduced the capacity and productivity of the local economy.
“The lower potential growth, the negative scenario of the international economy and the Purchasing Managers’ Index showing contraction in manufacturing activities in March as it went below the threshold of 50, will weigh on Malaysia’s growth.
“The effect will be marginal on the 1Q22 data but progressively more in the second quarter data.”
While the country’s manufacturing sales data for March was better than expected, Williams noted that it reflects nominal value of sales that has been driven by inflation.
The manufacturing sales data was improved on the back of higher exports value, driven by the exchange rate.
Centre for Market Education CEO Dr Carmelo Ferlito highlighted that private investments should be the main driver of the economy, if the government intends to achieve sustainable growth.
“Taking these out and looking at inflation adjusted figures, the manufacturing sales data is flat for 1Q22,” he said.
Taking a different stand than Casadio and Williams, Socio Economic Research Centre executive director Lee Heng Guie expects a GDP growth rate of 4.6% to 4.8% in 1Q22.
However, he acknowledged that the latest data on the services and construction sectors have yet to be released, making it difficult for a more accurate forecast to be made.
“Nevertheless, the manufacturing and services sectors are expected to drive the economic growth in the first quarter. Not only that, the improvement from the floods in December would help boost the growth.
“The low base effect from the first quarter of 2021 when the economy declined by 0.5% y-o-y would also lend support,” he said.
Pointing out that businesses have been affected by various operational issues, Lee said companies could not operate at desired levels.
This, in turn, has prevented the economy from achieving its potential growth.
“From our preliminary survey, we found that the top three issues are high raw material prices, labour shortages and cash flow,” he said.
Centre for Market Education CEO Dr Carmelo Ferlito highlighted that private investments should be the main driver of the economy, if the government intends to achieve sustainable growth.
However, he noted that the private investments in Malaysia remain weak.
“I am not a big fan of GDP forecasts, because they fail to indicate how an eventual growth or decline is built.
“For example, the GDP grew in 2021 by 3.1%, but that growth was mainly driven by government spending and private consumption; this means that growth is resting on very unstable pillars, being basically financed by household debt, government debt and inflation.
“In 2021, instead, private investments remained quite stagnant,” said Ferlito, adding that the key drivers of a sustainable growth path are savings and private investments.
On the challenges affecting the Malaysian economy, Ferlito said the domestic political conditions may hold back investors and impact the investment climate.
“Producer price pressure is also an issue.
“CME started to launch the alarm at the beginning of 2021, but we were quite ignored on the importance of monitoring inflation pressures, caused by the abundance of money into circulation rather than supply-chain disruptions,” he said.
Looking ahead, HELP University’s Casadio said there remains many weaknesses in the Malaysian economy.
There are also risks of a new recessionary phase, although the risk of recession is only around 25%, according to him.
“Disposable income and wealth among households are not recovering due to weak real wages growth, slow increase in employment and continuing withdrawals from the Employees Provident Fund to finance current expenditure even among the middle-income population,” he said.
Maybank Research’s recession model estimated a recession probability of 5% in Malaysia over the next 12 months.
The recession model is based on the United States’ three-month and 10-year bond yield spread.