TWO years into the Covid-19 pandemic, the Malaysian economy is now coming out of its trough after shrinking 4.5% in the third quarter of 2021. It is on a path to recovery in 2022, supported by the reopening of economic and social sectors.
The worst floods in decades in some states have tempered the recovery in late December 2021 and early 2022. We estimate real GDP to grow by 5.2% in 2022, an improvement from the estimated 3.4% in 2021.
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A revival of consumer spending (some pent-up demand), aided by a gradual recovery in the labour market (jobless rate stood at 4.3% in October 2021 versus 5.3% in May 2020) and the anticipated strong bounce-back in public investment via a high allocation of development expenditure (RM75.6bil) in 2022 will underpin a firmer economic recovery.
However, we caution that rising cost of building materials and weak public implementation capacity as well as the shortage of workers could delay the implementation of projects, resulting in slow disbursement of funds.
Since the economic reopening, the general mood and sentiment have turned positive as consumers are allowed to travel interstate and this has aided domestic-tourism. People mobility and traffic indicators have been showing signs of revival despite concerns about the Omicron variant.
Retail, recreation, grocery and shopping malls as well as workplace visits moved higher. Hotels’ occupancy rates have improved to around 40%-50% in recent months, thanks to a resumption in interstate travels and local tourists.
Nevertheless, the revival of international tourist arrivals (an average of 26.1 million per year in 2015-2019 and generated foreign exchange earnings of RM80.7bil per year in the same period) is deemed necessary to sustain a firmer growth in tourism and its related services.
Businesses are slowly returning to normality as owners are eager to restart and resume operations back to pre-Covid state. Wholesale and retail trade sales have returned to the highest level seen on record, rebounding 5.4% year-on-year (y-o-y) to RM116.4bil in October.
Motor vehicle sales bounced back 10.2% to RM14.2bil, from months of double-digit declines since June 2021.
Exports have been performing strongly in the second half of 2021, with some months surpassing expectations due to sustained global demand and firmer commodity prices.
It grew by 25.7% y-o-y in the first 11 months of 2021, driven by electronics and electrical products, refined petroleum, manufactures of metal, chemicals and chemical-related products as well as palm oil and related goods.
Motor vehicle sales bounced back 10.2% to RM14.2bil, from months of double-digit declines since June 2021.
We expect export growth to normalise to an estimated 1.8% in 2022 (estimated 24.5% in 2021) as shipments will moderate from a high base level averaging RM102bil per month in 2021.
There remains lingering uncertainty over global growth due to the Omicron variant. Global supply chain disruptions are also likely to persist into the first half of 2022, due to the time for bottlenecks to ease and production capacity to ramp up.
The shortage of workers and increased cost of raw materials have also dampened the pace of production.
We would like to share our thoughts on the five key risks the country should be aware of within the domestic and world economy as well as financial markets:
> The Covid contortions
Both the global economy and financial markets in 2022 are still likely to be sensitive to the Omicron variant, which spreads faster even though it may not cause severe illness.
As preliminary data suggests, the mutations in the Omicron variant may reduce the strength of double doses of vaccination’s immunity against reinfection. This compels a faster rollout of the booster dose vaccine against the virus.
The latest Covid contortions may temper the overall global recovery picture if countries are forced to reimpose movement restrictions.
> The Fed policy headwinds
We believe that the Federal Reserve (Fed) is more worried about rising inflation risks. Its hawkish stance will accelerate the pace of bond-purchase tapering and it has signalled three rate hikes in 2022.
It is possible that the Fed may move even faster on interest rates if inflation pressure does not ease going forward.
Other central banks have joined the Fed’s hawkish stance and are likely to stay highly sensitive to inflation.
The Fed’s tapering and monetary tightening will induce tighter liquidity conditions, financial volatility and capital flows reversal in the emerging markets (equity and foreign exchange markets).
It is possible that the Fed may move even faster on interest rates if inflation pressure does not ease going forward.
The financial volatility will spill over to Malaysia via financial channel and weaker ringgit against the US dollar.
> China’s slowdown
China’s economy is resuming a long-term deceleration. Authorities in Beijing have acknowledged that the economy faces “triple pressures: contracting demand, supply shocks and weakening expectations”, prompting liquidity and monetary easing to guide a soft landing.
It is still struggling with real estate woes and the fallout from the sporadic Covid-19 lockdowns. The attendant risk of global spread of the Omicron variant could result in a sharp economic slowdown in 2022. China’s zero-Covid target means no compromising on lockdown.
While Beijing will attempt to stop Evergrande debt fiasco’s contagion in its tracks, the situation is still likely to cause a further marked slowdown in China’s property and construction sector, which could dampen demand for mineral and commodities like iron ore, oil and palm oil.
Market consensus expects China to grow by 5% in 2022, a pullback from an estimated 7.1% in 2021. It is estimated that for every 1% decline in China’s GDP growth, Malaysia’s economic expansion would decrease by 0.3-0.5 percentage points.
> Cost and price pressures
We expect the snarled-up supply chains all over the world, which have also forced prices higher, are unlikely to ease significantly.
The prices of soft and hard commodities have increased substantially while logistic and shipping costs have skyrocketed although these have moderated in recent weeks. It added to production costs and has affected margins as well as profitability.
An ongoing global supply crunch for chips has hurt production across a number of industries – ranging from cars to consumer appliances, personal computers and smartphones – and this could drag on until this year.
On the domestic front, higher input costs, supply constraints and the shortage of workers are affecting companies and industries very differently, depending on their ability to absorb cost increases.
If businesses and manufacturers are unable to absorb these accumulating costs, some may have no choice but to pass on to consumers in the form of higher consumer inflation.
With consumer prices on the rise, estimated at 3% in 2022 (versus an estimated 2.5% in 2021), and higher cost of living amid a gradual recovery in the labour market and improvement in nominal wages, consumers who already had their income squeezed may rebuild savings and be more conservative in their spending.
Bank Negara is set to raise interest rates in the second half of 2022, although the timing will depend on the growth trajectory and inflation risk. A removal of monetary accommodation is needed to rebuild buffer and hikes must be in baby steps so as not to temper the recovery path.
A prolonged period of low interest rates can induce financial imbalances by reducing risk aversion of banks and other investors.
> Winding down domestic relief measures and policy changes headwinds
The government’s proposed policy changes, including tax, would have transitory and permanent supply-and-demand effects as well as market sentiment changes on individuals, companies, and investors in the financial markets as a whole.
The one-off 33% prosperity tax on chargeable corporate income exceeding RM100mil could result in a downside risk to this year’s corporate earnings and reduce dividend payments due to the higher taxes.
Businesses are facing the challenges of managing rising cost pressures even as they are recovering. It is envisaged that the relief measures and assistance (such as rental tax rebate, electricity discount, levy discount and freeze statutory contribution rate) will be discounted in 2022.
The proposed higher minimum wage and multi-tier levy, going forward, will add on to operating costs.
Lee Heng Guie is executive director of Socio Economic Research Centre. The views expressed here are the writer’s own.