MALAYSIA could see a full-year recession in 2020, due to the economic fallout from the movement control order (MCO) as well as a worsening global economic outlook, Fitch Solutions warned.

The market intelligence firm said it has slashed its 2020 real growth domestic product (GDP) growth forecast for Malaysia to -2.8 per cent, down from 1.2 per cent previously.

Fitch said this reflects the “heavy burden imposed on the economy by the lockdown measures imposed by the government to curb the spread of Covid-19, as well as the worsening outlook for the global economy”.

It is now expecting the global economy to contract by 3 per cent in 2020. It has also slashed its China growth forecast to 1.1 per cent, down from 5.9 per cent at the start of the year.

The resulting collapse in both domestic and external demand in Malaysia in the second quarter of 2020 will likely lead to a sharp contraction in that period, similar to the 6.8 per cent contraction seen in China in Q1, during which it was most affected by sweeping lockdowns, Fitch said.

Private consumption is expected to shrink 0.8 per cent, below its earlier forecast of 1 per cent. This is due to the MCO, which came into effect on March 18 and has shut all non-essential services and banned inter-state travel.

Investment is also expected to remain in contraction, although Fitch now expects it to shrink 6 per cent instead of 3 per cent previously. Foreign direct investment (FDI) is likely to sink into “deep contraction” due to the state of the global economy. Fitch noted that FDI shrank more than 78 per cent during the 2009 Global Financial Crisis, and this current crisis is likely to be worse.

Meanwhile, the government is left with very little fiscal space to enact further stimulus and help support the economy – another key factor underpinning Fitch’s bearish forecast, it said.

“The government’s stimulus measures, while numerically impressive at around 17 per cent of GDP or RM250 billion (S$82 billion) in total, is plagued by a relative lack of measures to subsidise wages, reduce taxes and otherwise cut business costs and will not be as effective in ensuring businesses stay afloat,” Fitch said.

“This also means that monetary policy, by default the main source of stimulus now for the economy, is unlikely to have a significant impact – cheaper loans are less effective when there are fewer businesses left to borrow,” it added.

“Following that, we do not expect a swift recovery, given the likelihood for some containment measures to remain in place to forestall a second wave of infections, as well as the time it takes for the economy to adjust and build up to full capacity after the disruptions caused in Q2 2020,” Fitch said.

A slight recovery is possible in Q4 at the earliest, and even this is subject to downside risks, it said, since it is highly dependent on how the rest of the world copes with the pandemic by that time.