Malaysia: Challenges to achieving 6% growth forecast

• May 31, 2021

FROM targeted to total lockdowns, as we still see spiking Covid-19 infections, there are concerns whether Malaysia can achieve its forecast growth of 6% to 7% for 2021.

Even if the overall economy and those already faring well recover, many businesses, individuals and households may be left further behind in an already unequal economy.

The “headline” statistics may eventually improve, but the prospect of a K-shaped recovery, with one segment climbing back up as another continues to suffer, is real.

“Rapidly rising Covid-19 cases and stricter measures have tempered growth expectations for the second quarter and beyond, ’’ said Socio Economic Research Centre executive director Lee Heng Guie.

Exports surged by a mind-boggling 63% year-on-year in April, which represented the fastest growth since February 1998.

If virus cases keep increasing, there would be concerns on operational risks in factories which may see orders piling up, but are not be able to operate at high capacity.

“If the healthcare system remains under pressure, Covid-19 measures last longer and take on more stringent forms, growth in the third quarter will be impacted as well, putting further downward pressure on full-year growth, ’’ said OCBC Bank economist Weillian Wiranto.

Before the movement control order (MCO) 3.0 was announced, green shoots were observed in the manufacturing and property sectors.

With MCO 3.0 continuing to evolve, the risks to this momentum remains to be seen.

“There has been an improvement in private capital expenditure with aggregate capacity utilisation returning to normal, but the risk of business sentiment and investment spending moderating cannot be overlooked, ’’ said RHB Bank Bhd group chief economist Dr Sailesh K. Jha.

Shortage of labour is already impacting the construction sector, especially seen in the delays in implementation of public sector programmes.

Hence, the multiplier effects from the construction sector will likely be modest in 2021.

“Recent clusters in the manufacturing and construction sectors as well as the pace of the vaccination rollout will likely pose some challenges to economic recovery, ’’ said Alliance Bank Malaysia Bhd chief economist Manokaran Mottain.

Domestic demand

The main challenge is the impact on domestic demand, especially consumer spending, where consumers turn cautious in view of the Covid-19 curbs, high unemployment rate and future uncertainties.

“Taking into account some traction from the export sector, the economy in 2021 is likely to fare better; the question is the pace of recovery and how soon economic activities can be restored to pre-pandemic levels, ” said Bank Islam Malaysia Bhd CEO Muazzam Mohamed.

Since the sales tax exemptions in June 2020, the automotive industry has seen growth in demand powered by reduced prices and consumers regarding personal transport as a safer option. The used car industry, which did not enjoy the same exmptions, doubled its volume in 2020.

With the exemptions set to expire at the end of June, the automotive market is expected to undergo a short period of adjustment, said Proton Holdings Bhd.

Affecting the export market are factors such as lockdowns overseas, and the exponential rise in cost of freight to certain regions.

It is vital for supply chains to major economic sectors to remain open; disruptions experienced last year (despite production lines being up and running) should not re-occur.

Small and medium enterprises (SMEs) should be supported as they provide private sector employment, and are the life blood of our factories, said Proton.

MCO 3.0 will put a squeeze on the retail business while reduction of man-hours at factories will affect productivity and output, said Small and Medium Enterprises Association national secretary Yeoh Seng Hooi.

“There are concerns that supply chains could be delayed; cost-push inflation is also a concern for manufacturers, with or without MCO 3.0.

“The shortage of labour at the operator’s level has affected production; larger companies have started to pinch workers from SMEs where many positions remain unfilled, ’’ said Yeoh.

Many locals also prefer to be in the gig economy rather than in manufacturing where the value-add has a higher economic contribution per capita.

The pandemic has had severe effects on sectors such as tourism, travel, retail, hotel and accommodation, coffee shops, hawker centres, eateries as well as the self-employed and those in the low-income category.

Revenue lost

Evey time dine-ins are prohibited, restaurants, retail outlets and coffee shops will lose about 80% to 90% of their revenue, which may be partially offset by online deliveries and takeaways.

In comparison with the dampening effect during the Chinese New Year, the impact during Hari Raya will be greater due to the larger base of Muslim consumers.

The estimated loss of RM300mil to RM400mil per day can still dent the low-base effect for a rebound in the second quarter, if virus cases keep piling up and stricter MCO measures are extended, said Lee.

Even in the first quarter, the economy had remained in contraction but this forecast of a 6% to 7% growth was being promoted, said former Inter-Pacific Securities head of research Pong Teng Siew. “To reach this forecast, we will need double-digit growth in the second half, ’’ said Pong.

The more measured MCO implemented in the first quarter might have weighed on recovery, resulting in real gross domestic product (GDP) still stuck in contraction.

With a tighter MCO being implemented, a recovery in the third quarter will likely be negatively impacted.

“It will be increasingly difficult for the government to achieve the GDP growth forecast for the year, ’’ said former RHB Research Institute chief Asean economist Peck Boon Soon.

Income disparity is a concern. Unless the government imposes windfall taxes on exporters, and passes it on as handouts, the broader economy will still feel the pain.

To make matters worse, there is a need for a longer period of MCO as the vaccination programme rolls along.

While the headline inflation forecast of 2.5% to 4% is maintained, the outlook is subject to global oil and commodity prices.

“With the capping of RON95 and diesel prices, the pain will likely come from food inflation that may hit in the coming months, with that in manufactured goods following through, ’’ said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.

Inflationary pressures are under watch, against disruptions in supply chains, the surge in demand from the US as well as easy money flowing into commodity futures.

Feedmill prices are higher, as livestock and egg producers eventually pass on the costs.

Price increases are also caused by disruption in soybean production from drought in Latin America and potential demand from electric vehicles driving up copper prices.

We are at an unhappy confluence of factors, to name a few, the current inability to control Covid-19 infections, slow pace of vaccinations, rising commodity prices, high unemployment and income inequality that is becoming more glaring.

The faster we get to grips with these problems, the easier it will be for everybody to breathe well again.

Source: https://www.thestar.com.my/business/business-news/2021/05/31/challenges-to-achieving-6-growth-forecast