The World Bank expects Malaysia’s gross domestic product (GDP) to contract by 4.9% this year, which is bigger than its earlier forecast of a 3.1% contraction, on the back of a sharper-than-expected 17.1% contraction in the second quarter of 2020.
“This change in the forecast reflects the heightened uncertainty surrounding the start and speed of the global recovery, which would weigh on investment decisions and external demand,” it said as quoted by The Sun Daily.
The World Bank expects the increased unemployment rate as well as other weaknesses within the labour market to continue to weigh on private consumption.
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“Reflecting these developments, most demand components (net exports, private consumption and private investment) are expected to contract in 2020,” it said in its October Economic Update for East Asia report titled ‘From Containment to Recovery’.
One of the key challenges for the country amid the pandemic is the possibility of a more protracted global recovery which could continue to hinder investment decisions, while further suppressing external demand, it said.
The World Bank expects prolonged international travel restrictions to weigh on the tourism sector. Political uncertainties, which include the possibility of a general election in the near term, may also weigh on private investment sentiment, stalling the progress of recovery efforts.
Overall, the risk to Malaysia’s outlook is tilted firmly to the downside, it said.
“Malaysia entered the outbreak with limited fiscal space due to a persistent decline in government revenue since 2012 and increased expenditure rigidity. This constrained the magnitude and quality of the fiscal response to the outbreak.”
This resulted in the government depending more on monetary and financial sector forbearance. With this, the number of vulnerable households is anticipated to increase due to higher unemployment and uncertainty on the outcome of the pandemic. These households would need continued financial support during recovery, said World Bank.
Meanwhile, it attributed the sharp decline in private consumption to movement control restrictions, lower household income as well as subdued consumer and business sentiment. Heightened uncertainty affecting business sentiment also resulted in a big drop in private investment.
“Following the economy-wide temporary closures and reduced business operations, the labour market was also significantly impacted, with unemployment rising to 5.1% in 2Q 2020, its highest rate in thirty years,” said the World Bank.
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