MALAYSIA’S economy grew at a stronger pace of 5% year-on-year during the first quarter of 2022 and this was largely driven by broader reopening of the economy that supported the continued recovery of domestic demand.

       The economic recovery continued to be driven by services and manufacturing, which collectively contributes to more than 80% of total gross domestic product (GDP).

       Within services, the wholesale and retail trade, transport and communication sub-sectors supported the strong expansion amid the recovery in consumer-related activities.

       On the demand side, private consumption was the main driver with higher spending on transport, communication and restaurant sub-segments. The consumption gains mitigated the continued lag in public investment.

       The domestic recovery phase has been persistently supported by the continued resilience in manufacturing activities, domestic industrial production and strong exports performance.

       In fact, manufactured export goods and manufacturing sales posted exceptional growth in recent months.

       This was despite the marginal slowdown in global manufacturing and trade-related activities.

       Notably, manufacturing production and sales has exceeded the pre-pandemic levels by 17.3% and 28.9% respectively, in March.

       The growth was mainly driven by higher demand for electrical and electronics especially semiconductors as well as basic iron and steel as well as petroleum products.

       Going forward, these commodities will remain the major catalyst to drive up the manufacturing sector given the persistently higher global demand.

       Besides, the wholesale and retail trade which accounts for almost one-third of the services sector is expected to gain further momentum in the near term.

       Despite various challenges, wholesale and retail trade has been on an upward trend reaching new highs in recent months and it is 18.9% higher than the average sales in 2020.

       This is on the account of the strong recovery momentum across the board with normalising demand.

       The recovery in the tourism sector will also provide further impetus for the services sector throughout this year.

       This is in view of the reopening of interstate travel and revival in domestic tourism activities.

       Meanwhile, the reopening of borders to international visitors should provide a boost to the tourism and tourism-related industries.

       As stated in the 12th Malaysia Plan, the government intends to focus on revitalising the tourism industry with efforts to restoring tourist confidence, enhancing quality of products and services, enhancing sustainability of tourism products, strengthening marketing strategies as well as intensifying domestic tourism.

       Domestically, the pent-up consumer demand and private consumption upon the easing of mobility restrictions had provided further impetus for the gradual normalisation in economic growth.

       It is worth noting that private consumption is 3% higher than the pre-pandemic level and contributed the most to the expenditure GDP growth during the first quarter of 2022.

       Overall, Malaysia’s economy remains on track to achieve a stronger growth for the full year given that the economy has picked up with broader-based reopening of business activities and international borders.

       Looking ahead into the second quarter, domestic demand will likely remain strong with favourable labour market conditions and improving consumer sentiment as well as business confidence.

       Despite the strong note in the first quarter of this year, risks remain tilted to downside primarily on the slowdown in major economies such as the United States and China.

       The International Monetary Fund has recently downgraded its global growth to 3.6% for 2022, from its previous projection of 4.4%. The downgrade was on the account of expected slowdown in China and the United States, of which the growth is lowered to 4.4% and 3.7%, respectively in 2022. From the global supply chain perspective, the softer growth in both the countries has severe implications for global trade and manufacturing activities in other parts of world.

       Given that China and the United States account for almost 30% of Malaysia’s total exports, the softer growth would adversely affect our exports of manufactured products and commodities.

       This would eventually translates into downturn in our GDP growth.

       My estimation indicates that a 1% cut in China’s GDP growth will result in a 0.2 to 0.4 percentage point slash in Malaysia’s GDP growth.

       Despite exports to China being on upward trend in recent months, the slowdown in that country and the reducing demand from its domestic goods are some of the emerging risks for Malaysia’s economic growth.

       The supply chain, which has yet to fully recover from the pandemic-induced impact, is once again disrupted due to various reasons.

       It lacks global resilience and breaks down in the face of multi-country disruptions.

       Since Malaysia is highly integrated in the regional and global supply chain network, the worsening disruptions will pose major risk to the overall growth outlook.

       Supply chain disruptions had led to an increase in global shipping and input costs, ultimately affecting the prices of consumer goods. The stronger demand and rising cost pressures from commodity prices as well as supply chain disruptions had led to an increase in inflation.

       Malaysia is not spared from the rising inflation risk.

       Lately, we have witnessed continued uptick in prices attributed to supply-related factors, especially for primary commodities and raw materials such as crude oil, fertilisers, natural gas and food.

       Inflation, which has been hovering between 2.2% and 2.3%, is higher than the national average of 1.9%. The government is in the process of reintroducing the goods and services tax. Although experts have been describing it as broad-based and targeted, the rate chosen must be lower so as not to burden the people.

       Given the current scenario of rising inflation amid a growing food crisis, we have to be mindful to fix a rate of between 3% and 4%.

       Rising subsidies are another concern in recent months.

       Already the fiscal deficit is in excess of 6% – one of the highest on record – and the government is reportedly looking to review the subsidy structure.

       Recently, the Prime Minister has hinted that the government is removing subsidy for cattle breading and poultry.

       The subsidy is instead being directed to the public, especially those in the bottom 40% group.

       The Finance Minister, on the other hand, hinted that total subsidy would exceed RM70bil this year, if no reforms are introduced.

       The significant weakening of the ringgit against the US dollar is another issue that could cast a profound impact on the domestic inflationary pressures.

       According to a study by Bank Negara, the direct impact of the exchange rate on consumer prices is often not pervasive and limited to selected items.

       However, it tend to have a lag effect. As such, future consumer prices will be based on products being bought at the current rate.

       Hence, if the current weakness is sustained, the rise in domestic prices will persist and this could be worsen if supply constraints remain in place.

       Manokaran Mottain is an independent director of Malaysia Venture Capital Management Bhd and adviser of Rising Success Consultancy Sdn Bhd. He has been a chief economist of several banks and Bank Negara. The views expressed here are the writer’s own.