Malaysia: Stronger 2Q growth seen

PETALING JAYA: The country’s economy may have recorded another strong year-on-year (y-o-y) growth in the April-to-June period, potentially surpassing the 5% y-o-y growth rate seen in the first quarter of 2022 (1Q22).

Ahead of the release of the gross domestic product (GDP) figures this Friday, economists when contacted by StarBiz think that strong domestic demand will remain a key driver of growth in 2Q22.

The rising private consumption by Malaysians, despite the threat of high price pressures, as well as the resilient external trade performance are expected to buttress the country’s second-quarter economic growth.

In a report issued yesterday, Malaysian Institute of Economic Research (MIER) said the country’s economic growth had gained momentum and private sector dynamism was “clearly back on track”.

Speaking with StarBiz, Socio-Economic Research Centre executive director Lee Heng Guie projected a “robust GDP growth” of 8.5% in 2Q22.

The forecast is based on how Malaysia has performed in terms of industrial production, external trade and retail sales over the recent months.

“The big drivers are buoyant growth in the services sector and sustained strong consumer demand, thanks to the reopening of the economy and international borders, underpinned by pent-up demand, the Employees Provident Fund’s fourth withdrawal, festive celebration spending and the improvement in labour market conditions.

“Domestic tourist spending has helped to lift higher retail sales, restaurants and accommodation,” he said.

Meanwhile, Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams and HELP University economics professor Paolo Casadio projected a GDP growth of 4.5% to 5% y-o-y in 2Q22, almost to the growth rate in the first quarter.

Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams

Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams

However, Williams and Casadio said that one must be “extremely cautious” in interpreting the upcoming 2Q22 GDP numbers.

“The y-o-y figure is highly affected by the two skyrocketing GDP numbers we saw in the last two quarters, 4Q21 and 1Q22.

“We expect to see a statistical revision in these two numbers, which is quite common.

“To understand the real underlying dynamics of the Malaysian economy, we have to focus on the quarter-on-quarter (q-o-q) percentage change to see if there is any positive momentum or traction in the economy in the second quarter and in the following quarters and to understand the coming phase of the economy,” they added.

Despite the projected y-o-y expansion in 2Q22, Williams and Casadio opined that the second-quarter GDP could decline on a q-o-q comparison.

This is mainly due to the contraction in inventories.

The potential drop in GDP comes from the combined effect of a huge accumulation of inventories in the previous quarters and a clear stagnation phase in the manufacturing sector.

“Companies have increased production based on a positive outlook, which has not been as buoyant as projected. So they have unsold stocks. They will slow or stop production until the stocks are sold.

“This contraction is likely to be reinforced by a contraction in public expenditure in 2Q22 after the huge jump in 1Q22 and by a slightly negative contribution q-o-q coming from external demand.

“There is also likely to be a moderate q-o-q contraction in private investment, following two skyrocketing figures in the previous two quarters,” they added.

It is noteworthy that Malaysia’s economy decelerated in 1Q22 on a q-o-q seasonally adjusted basis, after the economy grew 3.9% in the January-to-March 2022 period.

For comparison, the economy expanded by 4.6% q-o-q in 4Q21.

Commenting on the challenges witnessed in 2Q22, Williams and Casadio said clear signs of a slowdown or even stagnation in the manufacturing sector could be seen.

“This sector was the key driver of the recovery but now, mainly due to the effects of China’s lockdown, it has passed into a stagnation phase.

“We expect that this sector will experience a recession phase, factoring in the international weakness,” they said.

They also noted that the second quarter saw headwinds in the form of a foreign worker shortage.

While the issue has been resolved, the businesses would take some time to recover, according to Williams and Casadio.

“The supply-side restrictions on food are easing but will still affect 2Q22 numbers.

“Interest rate hikes are also designed to restrict demand, so they may have an effect as well.

“The possibility of an election is also a minor factor,” they said.

HELP University economics professor Paolo Casadio

HELP University economics professor Paolo Casadio

MIER, in its latest Malaysian Economic Outlook report released yesterday, said Malaysia’s real GDP growth needs to be at least 6% y-o-y in 2Q22 for the economy to jump back to the pre-Covid-19 output level that prevailed in 2019.

“The anticipated stronger growth is likely achievable on the basis of all the positive signs and prevailing macro indicators.

“The Malaysian economic recovery process is expected to gain momentum with continuing support by consumer spending, registering a strong growth of 5.8% in 2022,” it said.

The think-tank noted that Malaysia’s economic growth was gaining momentum and private sector dynamism was back on track.

Nevertheless, it said the country needed to find ways to further support these favourable developments, by avoiding to a large extent restrictive measures that inhibit the growth process, especially in the medium and longer term.

“There are still short-term weaknesses in the macroeconomic fundamentals that are expected to persist in the second half of this year and also next year.

“These include continuing net outflows of portfolio and ‘other investments’ by domestic residents, the rising cost of living, and elevated public sector and household debts,” according to MIER.