Malaysia is expected to see a slight contraction in the gross domestic product (GDP) in the third quarter of 2021 as the economy is still reeling from the government’s intermittent lockdowns as well as dissipating base effect, according to Malaysian Rating Corp Bhd (MARC).
Malaysia’s economy registered a sharp turnaround of 16.1% year-on-year in the second quarter of 2021 (Q2 2021), reversing the 17.2% contraction in Q2 2020.
MARC noted that while it was the highest quarterly growth to be recorded, the hike still failed to offset the contraction seen over the same period last year, reported the Borneo Post.
“The economy shrank 3.9% compared to Q2 2019, so it still fell short of returning to pre-pandemic output levels,” noted the rating agency.
“Bank Negara Malaysia’s (BNM) significant downward revision of its GDP growth forecast for 2021 from 6% to 7.5% to 3% to 4% is a testament to Malaysia’s long and winding recovery path,” it said as quoted by the Borneo Post.
The rating agency agreed with the revised forecast of BNM as its latest financial projection for 2021 falls within the range of 3.9%.
“Strong growth in early 2Q21 lost steam due to the stricter national lockdown imposed since late May, resulting in contractions in most industries and expenditure components,” it said.
Overall, Malaysia’s economy expanded 7.1% in H1 2021, compared to an 8.4% decline in H1 2020.
Meanwhile, the operating capacity constraints facing companies pushed the manufacturing Purchasing Managers’ Index to the contraction zone, which stood at 40.1% in July.
The rating agency expects the challenging operating conditions, like supply chain disruptions, to continue to weigh on business investment.
“Consumer sentiment hovered below the optimism threshold, mainly attributable to the elevated unemployment rate (2Q21: 4.8%),” it said.
“Even so, an early resumption of economic activities would be the saving grace in avoiding a double-dip recession in Q3 2021.”
In Q3 2021, MARC sees headline inflation easing to below 3% as the base effect dissipates.
The rating agency expects BNM to keep the overnight policy rate (OPR) at 1.75%, at least for the rest of 2021, adding that the present monetary setting is sufficiently accommodative.
It also believes that lowering the OPR will see banks taking a more cautious stance in lending, especially after the government announced a repayment moratorium.
“The marked revenue shortfalls and increased expenditure will cause the fiscal deficit to breach the government’s target of 6% of GDP in 2021,” said MARC.
“Instead, we think that the fiscal deficit could come in at least 6.5% of GDP.”
It added that the narrowing policy space and the limited fiscal resources may push the government to “temporarily raise the self-imposed statutory debt ceiling again, this time to 65%”.
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