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Executive Summary
A. World Economic Situation and Prospects
GLOBAL ECONOMY IS HEALING; BUT DO NOT BE COMPLACENT
- Goodbye 2020, an unprecedented year of a global health crisis-induced global recession. 2020 was an intense and volatile year as the unprecedented COVID-19 pandemic has ravaged across the globe, leaving a trail of massive socio-economic destruction and business damage. The ensuing Great Lockdown worldwide and devasting impact of pandemic has catalysed the most severe economic contraction since the Great Depression.
- Recovery continues, albeit unevenly in 4Q 2020. Our tracking of high frequency economic data and indicators showed that though global economic recovery continues, its momentum has seemingly slowed in 4Q 2020. The COVID-19 infections are still high and rising rapidly in major advanced economies, especially in the US and Europe as well as in Asia. Renewed containment measures have restrained economic activity and reduced consumer confidence. Global PMI readings for manufacturing and services activity have eased in November and December. Global trade also increased at a slower pace.
- Starting 2021 on cautious optimism.: The starting of a mass vaccine distribution and immunisation process in advanced economies towards end-2020 gives way to hope and optimism of a stronger recovery as we head into 2021. Notwithstanding that the vaccination is undeniably good news for consumers and businesses, a widespread distribution of the vaccines is unlikely until (at the earliest) in 2H 2021 and 2022. Hence, a full recovery will therefore be expected in late 2H 2021 and 2022.
- The US economic recovery will be supported by continued easy money and fiscal stimulus, including the proposed US$1.9 trillion COVID-19 stimulus package amid the dissipating impact of pandemic. Under the US President Biden’s administration, economic growth would likely benefit from increased spending on infrastructure and social security as well as a less disruptive foreign trade policy. Renewed lockdown measures in several European countries, and potential hiccups in vaccinations roll-outs, the eurozone economy should recover, albeit moderately, supported by the EU funding, ultra-loose monetary policy and fiscal stimulus, and strengthening external demand. In Japan, sustained government spending will help to buoy domestic demand, supported by a revival in exports. China is set to rebound sharply due to strong pent-up in private consumption and higher exports.
- But, the global economy is not yet completely out of the woods.: We see four key risks that might derail the global recovery: (a) Amid the vaccination program, there remain concerns over the multiple waves of new virus strains mutation, which are difficult to control, requiring renewed national lockdowns in many countries; (b) Inadequate policy support due to the limitation of monetary policy and fiscal space; (c) While investors expect a more predictable US policy trajectory under Biden’s administration, notably on trade and technology, in our view, it is too early to assess Biden’s administration in recalibrating the US-China relationship, trade and technology conflicts between the US and China remain a risk; and (d) Geopolitical and political flashpoints.
B. Malaysia’s Economic and Financial Conditions
CAUTIOUS OPTIMISM
- The third wave of COVID-19 tempers the strength of domestic economic recovery in 4Q 2020. The year 2020 saw the Malaysian economy plunged into economic turmoil as the Movement Control Order (MCO) sent the already slowing economic growth trajectory into a heavy tail-spin in 1H 2020. Real GDP has suffered a historic sharp economic output decline of 17.1% yoy in 2Q 2020 before narrowing to a smaller contraction of 2.7% yoy in 3Q, thanks to the prompt economic stimulus recovery package of RM305 billion or 21.8% of GDP in 2020 to limit the economic and financial damages on households and businesses from the pandemic.
- However, the emergence of a third wave of virus in late September, which resulted in high four digits new infection cases daily in recent weeks have tempered consumer and business sentiment in 4Q 2020 and in January 2021. It is estimated that the full-year 2020’s GDP to decline by 5.8%. The unemployment rate has re-ticked higher to 4.8% in November (764,400 unemployed persons) and 4.7% in October after stabilizing at 4.6% for two months (Aug-Sep).
- The economy has yet to be restored to a full capacity as the pandemic has disproportionately impacted the services sector versus the manufacturing sector due to social distancing measures and changes in consumer behaviour. The travel, tourism and aviation industry as well as retail sector will be slowly on the mend until the vaccine is distributed and at least 50% of population get vaccinated.
- Emerging cautious optimism in 2021. We recognize that the shape of Malaysia’s economic growth in 2021 is dependent on the development of infection rates and vaccination program, the effective implementation of Budget 2021’s spending programs and cash assistance, consumer and business confidence as well as the economic performance of Malaysia’s major trading partners.
- The rapid virus spread and mounting strains on the healthcare system have left the Government with no choice to implement three stages of movement restrictions tiered according to the level of infection risk by states for a two-week period (13-26 January 2021): (i) MCO in Pulau Pinang, Selangor, Federal Territory (Kuala Lumpur, Putrajaya and Labuan), Melaka, Johor and Sabah; (ii) Conditional MCO (CMCO) in Pahang, Perak, Negeri Sembilan, Kedah, Terengganu and Kelantan; and (iii) Recovery MCO (Perlis and Sarawak). Starting from 22 January, all states in Malaysia, with the exception of Sarawak, were placed under MCO 2.0 until 18 February.
- On 18 January, the Government rolled out Perlindungan Ekonomi dan Rakyat Malaysia (PERMAI) Assistance Package totalling RM15.0 billion, of which direct fiscal injection of RM6.6 billion was rolled to improve existing initiatives as well as accelerate the implementation of related initiatives as announced in previous stimulus packages and in the Budget 2021. This enhancement package is expected to provide some respite to particularly vulnerable households, self-employed, micro businesses and retailers.
- How our economy cope with these restrictions? The chances are that we will cope, but at a short-term cost, depending on the duration of MCO/CMCO. The cost will be even larger and a long-lasting impact for not doing good enough to balance the health risk prevention and supporting the economy.
- The inter-state travel bans and prolonged MCO for nearly all states would result in some loss in output and demand. It is estimated that two weeks MCO and CMCO will reduce GDP growth by 0.5 percentage points. If we assume one-month MCO/CMCO, it will reduce our baseline estimate to 4.0% from 5.0% previously in 2021 (estimated -5.8% in 2020). We remain wary of the Budget 2021’s implementation capacity risk as well as lingering policy and political risks.
- For an upside scenario, 6.0% for 2021 on assumptions of the accelerated containment of virus spread and vaccination, supported by a more robust rebound in services with the resumption of international travel. It is also assumed that the effective implementation of the largest ever fiscal stimulus (total expenditure of RM322.5 billion) or -5.4% of GDP budget deficit enhances a faster domestic demand driven recovery.
- Malaysia’s economic recovery tracker. A slew of economic indicators showed mixed performance, which collectively point to the economy will continue to heal, albeit unevenly as we move into 2021. Both the dated published data and anecdote evidence indicated that economic and business conditions are displaying disproportion recovery pace between different economic sectors, particularly following the reimplementation of CMCO/EMCO started in October 2020 to contain the third wave of COVID-19. The Recovery MCO has been extended to 31 March 2021.
- Fiscal spending needs to be effective and quick in terms of implementation and fund disbursement. The carry through spending effects from the RM305 billion direct and indirect fiscal injection, monetary and financial support will continue in 2021. On 18 January, RM15.0 billion Assistance Package was introduced to cope with MCO 2.0. The Budget 2021’s total expenditure of RM322.5 billion will continue to play a pivotal role in sustaining domestic demand through the implementation of projects and programs under the RM69.0 billion development expenditure.
- Monetary policy to stay accommodative. An easy monetary policy will remain in 2021 amid an arduous and uneven recovery scenario. As headline inflation is expected to increase at a moderate pace trajectory in 2021 and the labour market slack is unlikely to dissipate any time soon, we expect Bank Negara Malaysia to keep the current appropriate accommodative monetary policy stance for some time.
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