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2021Q4: Managing “Pandexit” Recovery

4 January 2022

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  • Global economy recovery continues but remains uneven. After two years of raging COVID-19 pandemic, global economic growth remains on track to close 2021 at an above-average pace estimated 5.5-6.0%. Nevertheless, there remains recovery divergence between advanced and emerging economies. The United States and Eurozone were doing better than expected; China is losing its growth steam; and India as well as some countries in the South-East Asia had generally performed below expectations. The fast-spreading Omicron variant amid uneven pace of vaccination compels a fast roll-out of the booster vaccine to contain reinfections.

  • Global growth will normalize in 2022 amid headwinds. We expect global economic growth will continue, albeit at a moderating pace estimated at 4.5% in 2022. The Omicron variant, on-going supply disruptions, rising inflation pressures and more hawkish central banks are the headwinds. Tighter financial conditions and capital flows volatility could weigh on global growth.

    What comes in the near-term is to what extent the impact of Omicron variant on global growth. While Omicron is more transmissible but less deadly than Delta, it will dent confidence and sentiment given still inequitable vaccinations across the countries in different regions. Three vaccine doses hold the key for protection against the new variant.

    The International Monetary Fund (IMF) had estimated that a more transmissible Omicron could cost the global economy a further US$5.3 trillion, in addition to the current projected loss of US$12.5 trillion.

  • Mixed global manufacturing and services sectors. The global economy has expanded for a seventeenth straight month in November (Global Composite PMI: 54.8 in Nov 2021 vs. 54.5 in Oct 2021), supported by growth of new orders, exports and a rise in employment levels. Output growth in services has outpaced that of manufacturing for the eighth straight month. Signs of supply constraints continuing to plague the manufacturing sector, particularly in the US and Europe.

    Unemployment rate in major advances economies has been gradually restored to pre-pandemic level; and wage level has improved. High inflation risk in focus.

  • Central banks have shifted focus on inflation. The journey of monetary tightening has begun as central banks see the need to start normalising interest rates from the record low level to tame inflation risk. The Federal Reserve has signalled to accelerate its tapering of assets purchase, followed by three possible interest rate hikes in 2022 and at least another two in 2023. Elsewhere, central banks in South Korea, Brazil, New Zealand, Chile, Mexico, Russia, etc. have already raised their policy rate higher compared to end-2020.

  • Five key risks to watch for global economy and financial market in 2022. We see the following five risks that could temper the continued expansion of global economy: (i) The COVID contortions – lingering risk of Omicron variant would dent consumer confidence and business sentiments, forcing re-imposition of some mobility restrictions; (ii) Stubbornly costs and price pressures would weigh on business cost, margins and profitability while rising inflation hurts households’ purchasing power; (iii) Hawkish central banks could result in a larger-than-expected increase in interest rate to balance out inflation risk while supporting growth; (iv) China’s economic slowdown due to the highly indebted property sector as well as trade and technology conflicts with the western economies; and (v) Political risks and events-induced disruptions across the globe.




  • A slow recovery in 2021. Malaysia’s economic recovery was interrupted by the prolonged pandemic and “open-shut” containment measures in the third quarter. We are convinced that the economy will turn around to an estimated +4.5% in 4Q 2021, from a contraction of 4.5% in 3Q, thanks to the economic reopening under the National Recovery Plan (NRP).

    Consumer sentiment and business confidence have gradually restored. Some pent-up demand was seen in 4Q 2021, helped by inter-state travels to revive domestic tourism. The labour market condition is slowly improving. Costs and inflation pressures have built up, resulting in higher inflation expectations ahead. Business activities have resumed, albeit unevenly in some sectors, especially the tourism and retail sectors. We are now estimating real GDP to grow by 3.4% in 2021 (-5.6% in 2020).

  • A better year in 2022. Two years into the COVID-19 pandemic, the Malaysian economy is coming out of its economic trough in 3Q 2021 and is on the path to 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 estimated 3.4% in 2021.

    A sustain revival of consumer spending, 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. Persistent supply chain disruptions, rising cost of raw materials and the shortage of workers have weighed on cost, production, margins and profitability. 

    By sector, the 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. The services sub-sectors, namely the transport, telecommunication and financial services are expected to gain growth traction on a recovery in domestic demand.

    The manufacturing sector will continue its growing momentum amid facing constraints from the supply chain disruptions and workers shortage. Output of agriculture sector will be supported by production of palm oil, and rubber as well as fisheries amid the shortage of workers and increased cost of fertilizers and animal feed as well as the impact of climate change. 

    The on-going public infrastructure projects as well as the implementation of new projects and approved manufacturing projects will help to turnaround the construction sector from a slump in 2020-2021. The mining and quarrying sector is expected to remain weak on lower crude oil and condensates production, following the scheduled shut down of oil and gas plants and facilities for maintenance.

    We expect exports to normalize to 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 increased cost of raw materials also dampened the pace of production.

  • Inflationary pressures are building up. Headline inflation, as measured by the Consumer Price Index has consistently climbed higher to 3.3% in November 2021, marking four months of continuous rise from 2.0% in August. Besides continued double-digit increases in transport prices, food prices and non-alcoholic beverages have climbed higher (2.7% in November 2021, highest since March 2018). Among the significant increases in food prices were fresh meat and fish, eggs, oils, and fresh vegetables. Prices for financial services, housing, water, electricity, gas and other fuels as well as furniture and furnishings also increased substantially. Overall, we estimate inflation to increase by 3.0% in 2022, higher compared to an estimated 2.5% in 2021.

    The Producer Price Index (PPI) has continuously increased for ten straight months with eight months of double-digit growth in November 2021. The main increases came from crude materials for further processing (33.4% yoy in November; 31.2% in Jan-Nov 2021) as well as intermediate materials, supplies and components (12.1% in November; 7.6% in Jan-Nov 2021). Given rising cost of raw materials and persistent supply disruptions, the increase in PPI is likely to continue in 2022, at least in the first half-year. The cost pass-through effect exert upward pressure on consumer inflation.

  • Interest rates to stay unchanged at 1.75% in 1H 2022. Bank Negara Malaysia (BNM) 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. We expect BNM to raise the policy rate by 25-50 basis points to 2.00%-2.25% in the second half-year of 2022.


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