First Quarter Malaysia Economy Report Card, Gives Glimpse Of What Lies Ahead

Central Bank recently released reports on the Malaysian economy which registered a smaller decline of 0.5% in the first quarter compared to 4Q 2020 which declined by 3.4%. Accordingly the growth performance was supported mainly by the improvement in domestic demand and the robust exports performance, particularly for E&E products. It also stated that growth was supported by some of the continued policy measures which has eased the stress on the economy.

However due to the imposition of the Second Movement Control Order and the continued closure of international borders and restrictions on inter-state travel, weighed on economic activity. As restrictions were eased in February and March, the economic activity gradually picked up, prompting the Governor Datuk Nor Shamsiah to say “The better overall performance reflects the improvement in domestic demand and the strength in our exports.”

If the first three month was anything to go by, the country’s calculated move resulted in string positive results despite a lockdown, now we again facing another lockdown which could drag into June can Bank Negara use the same playbook to keep our economy humming? All signs point to a definite yes!

Quarter 1 saw all economic sectors registering an improvement, particularly in the manufacturing sector,on the expenditure side, growth was driven by better private sector expenditure and strong exports. If were to consider the quarter-on-quarter seasonally-adjusted basis, the economy actually registered a growth of 2.7% against -1.5% in the preceding quarter.

Able Hands

Despite the recent re-imposition of containment measures, the impact on growth is expected to be less severe than that experienced in 2020, as almost all economic sectors are allowed to operate. Overall, the growth recovery will benefit from better global demand, increased public and private sector expenditure as well as continued policy support. This will also be reflected in the recovery in labour market conditions, especially in the gradual improvement in hiring activity.

Higher production from existing and new manufacturing facilities, particularly in the E&E and primary-related sub-sectors, as well as oil and gas facilities will provide a further impetus to growth. The roll-out of the domestic COVID-19 vaccine programme will also lift sentiments and contribute towards recovery in economic activity. Nevertheless, the pace of recovery will be uneven across economic sectors. Datuk Nor Shamsiah cited “Going forward, Malaysia is well positioned to continue benefitting from stronger global economic and trade activities. While the growth outlook continues to be shaped by developments surrounding the pandemic, the implementation of containment measures which are mainly aimed at curbing social activities and allow almost all economic sectors to operate, would minimise the impact on economic activity.”

In 2021, headline inflation is expected to average higher between 2.5% and 4.0%, primarily due to the cost-push factor of higher global oil prices. In terms of trajectory, headline inflation is projected to temporarily spike in the second quarter of 2021, driven by the lower base from the low domestic retail fuel prices in the corresponding quarter of 2020. Headline inflation in April and May may rise to approximately between 6.5% and 7.0%.

However, this will be transitory as headline inflation is expected to return to below 5.0% in June, and continue to moderate thereafter as the base effect dissipates. Underlying inflation, as measured by core inflation, is expected to remain subdued, averaging between 0.5% and 1.5% for the year, amid continued spare capacity in the economy. The outlook, however, is subject to global oil and commodity price developments.

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