Malaysia's economy set to accelerate further

09 Apr 2022 12:16pm
The Malaysian economy had performed remarkably well for the past two and a half years despite the Covid-19 pandemic. - 123RF Photo
The Malaysian economy had performed remarkably well for the past two and a half years despite the Covid-19 pandemic. - 123RF Photo
SHAH ALAM - The Malaysian economy had performed remarkably well for the past two and a half years despite the pandemic.

Now that the shackles have been lifted and the borders have reopened, will the economy continue to soar or lose momentum?

All eyes on Q1

All eyes will be on Bank Negara Malaysia in the near term as the central bank announces the first quarter 2022 economic figures.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said : We are looking at 3.5 percent growth for the first quarter of 2022.

Such projection is premised on the strong contribution from the net exports as well as improving consumer spending while businesses would remain cautious in their investment activities, Afzanizam told Sinar Daily.

Meanwhile, Associate Professor Dr Ahmed Razman Abdul Latiff said 2022 will be a positive year overall with the country registering a 5 per cent economic growth.

"This is due to several factors such as the end of the Recovery Movement Control Order during the first quarter in 2021 which ended in March 2021.

The University Putra Malaysia Business School senior lecturer said the 2022 first-quarter growth is expected to be robust because, at the moment, the country is experiencing higher revenue due to rising prices in oil and gas as well as palm oil.
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Economy to accelerate further in the second quarter

However, Afzanizam expects the economy to accelerate further in the second quarter of 2022 onwards as the reopening of the international borders will stimulate the domestic demand following the spillover effects from the tourism-related industries.

Additionally, the government's commitment to provide subsidies and cash transfers programs would help propel consumer spending.

Meanwhile, Razman said "For the second quarter of this year, I expect another positive growth, probably around 8 per cent as the second quarter in 2021 saw one month of lockdown during the month of June which caused the disruption to supply of products and services.

"For the second quarter this year, we expect continuing higher revenue from oil and palm oil.

"The border opening on April 1 will also encourage higher arrival of foreign tourists to Malaysia," Razman told Sinar Daily.

Downside risks

Downside risks nonetheless would be the emergence of variant of concern (VOC) with respect to Covid-19 and the war in Ukraine which could potentially affect the strength of the global recovery.

More prospects for growth in the second quarter of 2022

AIMST University vice-chancellor Professor Datuk Dr. John Antony Xavier said prospects for growth in the second quarter will also hinge on the interplay of four major global forces.

They will determine the strength of Malaysia’s second-quarter performance.

First is the stingier monetary policy of the US. The Federal Reserve, US central bank, plans to reduce its balance sheet which has ballooned to US$9 trillion through quantitative easing since the pandemic started in 2020.

The buying of assets then was to help propel the economy.

To reduce its balance sheet, the Federal Reserve will have to start selling the assets it had accumulated during quantitative easing.

This will mean sucking out money from the economy.

Compounding this move is the plan by the Federal Reserve to increase the interest rates.

These two instruments are designed to rein in inflation in the US which is hovering above 7 per cent.

Such tight monetary policy by the US and the EU, including the UK will create uncertainty in emerging markets, including Malaysia.

It will cause a greater outflow of foreign funds as they seek better returns in advanced economies.

Such capital outflow will cause pressure on the Malaysian economy as it discourages both foreign and domestic investments; unless Malaysia also increases its benchmark interest rates.

"For example, extensive capital outflow from Japan in the 1990s triggered two decades of stagnant growth in the world’s second-biggest economy," Xavier told Sinar Daily.

Second, China’s harsh zero-Covid policy and the attendant massive lockdowns will add to the supply-chain disruptions and depress its economy further.

China is Malaysia’s top trading partner, comprising 14 per cent of Malaysia’s total trade (exports and imports).

Accordingly, Malaysia’s economy can be expected to be impacted negatively.

Third, the war in Ukraine further amplifies the fractures in global supply chains.

"More sanctions against Russia are expected in response to Russia’s brutality,'' said Xavier.

"It will cause further disruptions in the global supply chain. These supply-chain disruptions will raise the cost of imports, especially for a nation such as Malaysia that relies on imported raw materials.

"The latter comprise roughly two-thirds of our final manufacturers. Malaysia too supplies more than a tenth of the world’s electrical and electronic (E&E) components.

"When supply chains are disrupted and demand softens for the electronic products, our E&E exports too will likewise be impacted," he added.

Fourth, unless the war ends quickly, oil prices are unlikely to climb down.

OPEC (Organisation of Oil Exporting Countries) too has shown no signs of increasing output despite pressure from the US and the EU to do so.

"The industry has suffered long years of underinvestment in fossil fuels as well as shale gas as a result of the imperative to rein in global warming,'' said Xavier.

It is unlikely that the production of fossil fuels will increase in the short run.

Oil-supply restrictions come against a resurgent consumer demand that has been pent up over the last two years.

As such, inflation is bound to spike.

"If energy prices are not arrested quickly the world could spiral into a recession. That will tamp down our promising growth of per cent,'' he said.

"Indeed, the World Bank expects our growth to be a notch lower at 4.8 per cent compared to the government’s growth forecast of 5.5 per cent to 6.5 per cent. Invariably, electricity charges will rise as the price of coal, which comprises half of the fuel mix in Malaysia’s electricity generation, rises in tandem with oil prices.

"All this will invariably cause inflation to spike beyond the 2.3 per cent inflation rate. To this we must add increases in the price of animal feed such as wheat and corn,'' he added.

Some one-fifth of the world’s production comes from Russia and Ukraine.

Increases in animal-feed prices will certainly find their way into food prices, said Xavier.

"If inflation becomes a worry, interest rates will invariably rise. That will dampen investments and further dent our economic growth.

"The comforting news is that palm oil prices have increased by about 6 per cent and this should benefit our palm oil growers.

"Because of the expansionary policies of the government, the impact of supply-chain disruptions has been slow in coming.

"Let us hope that the war will end soon and normalcy in the global economy is restored,'' he said.