GROSS domestic product (GDP) in the third quarter of 2021 shrank by 4.5%, but inflation is not yet a concern at the moment despite it being almost a global issue.
“Growth (GDP) will accelerate to 5.5% to 6.5% next year. We are also not seeing any indications of a broad-based price increase or excessive wage pressures.
“We expect price pressures to remain moderate in 2022, given the spare capacity in our economy,” Bank Negara governor Datuk Nor Shamsiah Mohd Yunus said at a press conference yesterday.
Meanwhile, Bank Negara says that underlying inflation, as measured by core inflation, is expected to average below 1% for the year.
The central bank says headline inflation moderated to 2.2% in the third quarter from 4.1% in the second quarter.
This was due mainly to the dissipation of the base effect from fuel prices, and the implementation of the three-month electricity bill discounts, it says.
Core inflation remained at 0.7% during the third quarter from 0.7% in the second quarter.
Nor Shamsiah said that there is still room for improvement in both growth and employment before demand-driven price pressures become a cause of concern, even if some businesses choose to adjust their prices and offer more competitive wages to attract workers.
“Having said this, there are many moving parts both domestically and abroad that can affect our inflation outlook: this includes the global commodity price developments and risk from prolonged supply related disruptions. We will continue to keep a close eye on this,” she said.
In the year-to-date period, the central bank says headline inflation averaged at 2.3%, and is projected to average between 2% and 3% for 2021.
As economic activity normalises, the central bank says core inflation is expected to edge upwards but remain benign, given the continued spare capacity in the economy and slack in the labour market.
The outlook, however, continues to be subject to global commodity price developments and some risk from prolonged supply-related disruptions, it adds.
For the whole of 2021, Bank Negara says the economy is on track to grow by 3% to 4%.
Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz says in a statement that the GDP had increased by 3% in the first nine months of 2021, compared to a 6.4% contraction in the same period last year.
Growth will be supported by the increase in economic activities as containment measures are progressively relaxed, amid continued policy support, the central bank says.
“The various relaxation of restrictions for fully vaccinated individuals, including for interstate travel, would also spur tourism-related activities. In addition, the strength in global demand will continue to support export growth,” it says.
Meanwhile, Bank Negara reiterates and keeps its forecast that GDP is expected to grow by 5.5% to 6.5% next year.
This forecast is also predicated by and large on the sustained progress in the fight against Covid-19, the central bank says.
“Despite headwinds throughout the third quarter of 2021, various key economic indicators point to strong recovery momentum, especially as the nation enters the fourth quarter of the year and into 2022,” Tengku Zafrul says.
“Furthermore, in the third quarter, we saw RM12.8bil in net foreign direct investment (FDI), bringing the total net FDI for the first nine months of this year to more than RM30bil,” he adds.
“We have improving demand on the global front, particularly from Malaysia’s major trade partners and this would continue to provide support for our economy domestically with many of the Covid-19 restrictions being lifted,” Nor Shamsiah said.
“As economic activities resume, we expect incomes to improve as businesses start to rehire. The reopening of the economy and improvement in labour market conditions will also boost the sentiment of both businesses and consumers. This is going to be important in driving spending and investment,” she added.
Nor Shamsiah also noted that the continued progress in key infrastructure projects and expansion in the commodity and manufacturing sectors’ capacity will help support a broader recovery.
“While we are seeing these positive developments, Covid-19 is still a major threat and it has taken a heavy toll on industries and communities.
“Therefore, we must also accelerate structural reforms to foster dynamism, rebuild buffers and secure a more durable workforce,” Nor Shamsiah said.
On the third-quarter GDP performance, Bank Negara says that the contraction of the economy in the quarter was largely due to the strict Covid-19 containment measures particularly in July, under phase one of the National Recovery Plan.
“Economic activity subsequently picked up as more states transitioned into phase two with less restrictive containment measures,” Bank Negara says in its statement.
“Progressive lifting of containment measures and continued improvements in the labour market will be key to support the recovery, going forward,” Nor Shamsiah said.
On the supply side, all economic sectors registered a contraction in the third quarter. Bank Negara says the construction sector contracted the most due to operating capacity limits.
On the expenditure side, the central bank says that domestic demand declined by 4.1%, weighed down by the contraction in private consumption and investment activities, while continued increase in public sector consumption spending provided support to growth.
Meanwhile, OCBC Treasury Research says in its note that the third-quarter GDP slump was much greater than its expectations. “Given how bad the pandemic resurgence was and how long-lasting the restriction orders were to contain the virus uptick in the third quarter, it should be no surprise to see growth slumping sizeably during the period,” it says.
“As it turns out, the impact was nonetheless much greater, with the economy contracting by 4.5% year-on-year instead of 2.3% that we had in mind,” it adds.
It says that even though the data was a miss, it is a constant reminder of the havoc that the virus can still cause for the economy at large.
“Malaysia is in an undoubtedly better place now in large part due to the high level of vaccination rate that should offer the economy at least some immunity from future resurgence bouts,” OCBC adds.