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Malaysia: External factors to play big role in GDP growth
KUALA LUMPUR: Economists are cautious about the outlook of the economy in the second half of 2022, in light of enduring challenges such as the Russia-Ukraine war, soaring inflation, supply chain disruptions and the weaker ringgit.
HELP University economist Paolo Casadio believes the prevailing global economic challenges and uncertainties will disrupt the recovery trajectory in Malaysia and other countries around the world.
“We estimate Malaysia’s gross domestic product (GDP) growth rate for 2022 to be 3.5% in the baseline scenario (50% probability), implying an economic contraction in the second and third quarters of this year,” he told StarBiz.
Casadio noted that the slowdown of China during the second quarter of the year already had a significant impact on exports. This, he said, will result in a contraction of growth on a quarterly basis.
“In a risk scenario (40% probability), considering a ‘catastrophe’ happening in the international economic and financial system, we consider another contraction happening in the third quarter and probably in the fourth quarter as well, resulting in a full-blown recession. This will not affect Malaysia only, but it will be worldwide.”
In predicting Malaysia’s GDP outlook for the second half of 2022, Malaysia University of Science and Technology professor Geoffrey Williams forecasts three types of scenarios.
“The upside scenario is where GDP is expected to grow 5% this year, as forecast by the government and Bank Negara. This is based on the assumption that everything will go smoothly and converge to a pre-pandemic scenario.
“We believe there is a 10% probability of this scenario occurring.”
In a baseline scenario (with a 50% probability), Williams said there could be “some persisting international factors” that would result in a downward revision of growth in main parts of the world.
Finally, in a downside scenario (40% probability), Williams cautioned that this could be some “catastrophe” affecting the international economy.
“The catastrophic events can be many – geopolitical, with an extension of the war, financial, with a stock market or a dollar crash, political turmoil especially in the United States before the mid-term elections or economic, with a full-blown recession in some European countries.”
In the baseline scenario, Williams said GDP is forecast to grow 3.5% and 4.5% in 2022 and 2023, respectively.
“In the catastrophe scenario, the Malaysian economy is sliding into a technical recession (in the second and third quarters) and growth close to 0% for the whole year, following many countries around the world.”
Centre for Market Education chief executive officer Carmelo Ferlito, meanwhile, said the reopening of the economy has played a positive role in different economic indicators, in particular domestic consumption.
“So, the aggregate will be a good one, but I think that investments will still play a marginal role,” he said.
Malaysia’s economy grew by 5% in the first quarter of 2022, supported by increases in both domestic and external demand as well as labour market recovery.
During the quarter, monthly GDP grew by 4.3% in January, 5.2% in February and 5.4% in March.
The labour market showed the unemployment rate at 4.1%, a 0.2-percentage-point improvement compared with the previous quarter, attributed to the implementation of a wage subsidy programmes worth more than RM20bil and successful job creation initiatives such as JanaKerja and JaminKerja.
The central bank expects GDP growth for 2022 at between 5.3% and 6.3% (2021: 3.1%).
In a statement on Saturday, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the country’s economy is expected to continue to strengthen in the second quarter of this year, following the encouraging GDP growth of 5% in the first quarter, including the continued improvement in wholesale and retail trade,
He pointed out that the economy was gradually improving and had started to expand based on various indicators for May 2022.
To accelerate the recovery momentum, Tengku Zafrul said the Finance Ministry had kickstarted engagement sessions in an effort to establish measures that took into account the needs of various stakeholders.
“Budget 2023 will emphasise structural reforms and boosting economic resilience. With its theme of ‘Strengthening Recovery, Facilitating Reforms Towards Sustainability of Economic Resilience and Well-Being of Keluarga Malaysia’, the government will continue to focus on the well-being of the people, businesses and economy,” he said.
Meanwhile, Ferlito said economic growth in the first quarter was primarily driven by private consumption and government spending.
“Instead, investments have remained stagnant and this is the concerning part of the growth recorded so far.
“We need to look at the micro-foundations behind the macro-aggregates in order to get a better picture of the economic performances of a country,” he said.
Going forward, Ferlito said international factors will play a significant role in Malaysia’s GDP growth.
“China’s policy on Covid for sure will impact Malaysia, as it is the main trading partner for our country. Supply-chain disruptions will keep on playing a role.”
Domestically, Ferlito said poor policy making and political uncertainty could keep investors at bay.
Williams noted that there had been a big hit on the underlying structure of the economy in Malaysia due to two years of lockdowns.
“We see some symptoms of this in the food crisis and how companies cannot respond quickly. This will slow growth and flexibility in the market.
“We are also concerned that the central bank may follow the Federal Reserve and increase rates, which will have an effect on loan repayments for consumers and companies and will slow growth and investments.”
Source: https://www.thestar.com.my/business/business-news/2022/07/11/external-factors-to-play-big-role-in-gdp-growth