By Lee Heng Guie
Two years into the COVID-19 pandemic, the Malaysian economy is coming out of its economic trough in 3Q 2021 (GDP at -4.5% yoy) and is on the path of recovery in 2022, supported by the reopening of economic and social sectors. The worst floods in decades in some states have tempered the recovery in late December 2021 and early 2022. We estimate real GDP to grow by 5.2% in 2022, an improvement from an estimated 3.5% in 2021.
A revival of consumer spending (some pent-up demand), aided by a gradual recovery in the labour market (jobless rate at 4.3% in October 2021 vs. 5.3% in May 2020) and the anticipated strong bounce back in public investment via high allocation of development expenditure (RM75.6 billion) in 2022 will underpin a firmer economic recovery. However, we caution that rising cost of building materials and weak public implementation capacity, as well as the shortage of workers, could delay the implementation of projects, resulting in slow disbursement of funds.
Since the economic reopening, general mood and sentiment are positive as consumers were allowed inter-state travels, and aided domestic tourism. People mobility and traffic indicators have been showing signs of revival amid wary about the Omicron variant. Retail, recreation, grocery, and shopping malls, as well as workplace visits, moved higher. Hotels’ occupancy rates have improved to around 40-50% in recent months, thanks to a resumption of inter-state travels and local tourists. Nevertheless, the revival of international tourist arrivals (an average of 26.1 million per year in 2015-2019 and generated foreign exchange earnings of RM80.7 billion per year in the same period) is deemed necessary to sustain firmer tourism and related services.
Businesses are slowly returning back to normality as business owners are eager to restart and resume back to the pre-COVID state. Wholesale and retail trade sales have returned to the highest level seen on record, rebounding 5.4% yoy to RM116.4 billion in October. Motor vehicles bounced back 10.2% to RM14.2 billion, from months of double-digit declines since June 2021.
Exports have been performing strongly in 2H 2021, with some months surpassing expectations due to sustained global demand and firmer commodity prices. It grew by 25.0% yoy in the first ten months of 2021, driven by electronics and electrical products, refined petroleum, manufacturers of metal, chemicals & chemical-related products, as well as palm oil and related goods.
We expect exports to normalize to an estimated 1.8% in 2022 (estimated 24.5% in 2021) as growth will moderate from a high base level averaging RM102.0 billion per month in 2021. There remains lingering uncertainty over global growth due to the Omicron variant, global supply chain disruptions are also likely to persist into the first half of 2022, due to the time for bottlenecks to ease and production capacity to ramp up. The shortage of workers and the increased cost of raw materials also dampened the pace of production.
We would like to share our thoughts on the five key risks we should be aware of within the domestic economy and world economy as well as financial markets.
- The COVID contortions
Both the global economy and financial markets in 2022 are still likely be sensitive to more faster spreading intensity of the Omicron variant though it may not cause severe illness. As preliminary data suggests the mutations in the Omicron variant may reduce the strength of double doses of vaccination’s immunity against reinfection, this compels a faster roll out of the booster dose vaccine against the virus. The latest COVID contortions may temper the overall global recovery picture if countries force to reimpose restrictive movements.
- The Fed policy headwinds
We believe that the Fed is more worried about rising inflation risks, and its hawkish stance will accelerate the pace of bond-purchase tapering and has signaled three rate hikes in 2022. It is possible that the Fed may move even faster on interest rates if inflation pressure does not ease going forward. Other central banks have joined the Fed’s hawkish stance, and are likely to stay highly sensitive to inflation.
The Fed’s tapering and monetary tightening will induce tighter liquidity conditions, financial volatility and capital flow reversal in the emerging markets (equity and foreign exchange markets). The financial volatility will spill-over to Malaysia’s shore via financial channel and weaker ringgit against the US dollar.
- China’s slowdown
China’s economy is resuming a long-term deceleration. Beijing authorities have acknowledged that the economy faces “Triple pressures: contracting demand, supply shocks and weakening expectations”, prompting liquidity and monetary easing to guide a soft landing.
It is still struggling with real estate woes and fallout from sporadic COVID-19 lockdowns. The attendant risk of the global spread of the Omicron variant could threaten a sharp economic slowdown in 2022. China’s zero covid cases target mean no compromising on lockdown.
While Beijing will attempt to stop Evergrande debt fiasco’s contagion in its tracks, the situation is still likely to cause a further marked slowdown for China’s property and construction sector, which could dampen demand for mineral and commodities like iron ore, oil and palm oil.
Market consensus expects China to grow by 5.0% in 2022, a pullback from an estimated 7.1% in 2021. It is estimated that for every 1% decline in Chinese GDP growth, Malaysia’s economic expansion decreases by 0.3-0.5 percentage points.
- Price pressures
We expect the snarled-up supply chains all over the world, which have also forced prices higher, are unlikely to ease significantly. The prices of soft and hard commodities have increased substantially as well as skyrocketing logistic and shipping costs though have moderated in recent weeks, have added to production cost and affected margins as well as profitability.
An ongoing global supply crunch for chips has hurt production across a number of industries, ranging from cars to consumer appliances, personal computers and smartphones could drag on till 2022.
On the domestic front, higher input costs, supply constraints, and the shortage of workers are affecting companies and industries very differently, depending on their ability to absorb cost increases. If businesses are unable to absorb these accumulating costs and also not erode their profit margins, some businesses and manufacturers have no choice but to pass on to consumers in the form of higher consumer inflation.
With consumer prices on the rise estimated 3.0% in 2022 (vs. estimated at 2.5% in 2021) and higher cost of living amid a gradual recovery in the labor market condition and improvement in nominal wages, consumers already had their incomes squeezed may rebuild savings and more conservative in their spending, which could hold back consumer spending.
Bank Negara Malaysia set to raise interest rate in 2H 2022 though the timing will depend on the growth trajectory and inflation risk. A removal of monetary accommodation is needed to rebuild buffer and hikes in baby steps so as not to temper the recovery path. A prolonged period of low interest rates can induce financial imbalances by reducing risk aversion of banks and other investors.
- Winding down domestic relief measures and policy changes headwinds
The Government’s proposed policy changes, including tax would have transitory and permanent supply and demand effects as well as market sentiment changes on individuals, companies, and investors in the financial markets as a whole.
The one-off 33% Prosperity Tax rate on chargeable corporate income exceeding RM100 million could result in downside risk to 2022’s corporate earnings and reduce dividend payments or payouts due to the higher taxes. Tax on foreign-source income received by any Malaysian resident person could see companies will retain more of their earnings abroad for reinvestment. This would mean that less investment income will be remitted back home.
Businesses are facing the challenges of managing rising cost pressures as they are healing their recovery. It is envisaged that the relief measures and assistance (such as rental tax rebate, electricity discount, levy discount, freeze statutory contribution rate etc.) will be discounted in 2022. The proposed higher minimum wage and multi-tier levy going forward will add onto operating cost.
-Mr Lee Heng Guie is the Executive Director at ACCCIM’s Socio Economic Research Centre (SERC). SERC is tasked with carrying out in-depth research and analysis on a wide range of economic, business and social issues in support of the formulation of public policies to shape Malaysia’s national socio-economic and industrial development agenda.
