MIER: MCO extension will cause 2pc GDP growth contraction, delay in lifting will deepen recession

The proprietor of a convenience store waits for customers in front of his shop in Kuala Lumpur April 16, 2020. — Picture by Miera Zulyana
The proprietor of a convenience store waits for customers in front of his shop in Kuala Lumpur April 16, 2020. — Picture by Miera Zulyana

KUALA LUMPUR, April 23 — The Malaysian Institute of Economic Research (MIER) cautioned policymakers today about the huge cost that the movement control order (MCO) has had on the economy, warning of a deepening recession should restrictions be extended.

Any extension of the MCO after the second phase would cause a 2 per cent contraction in GDP growth, the think tank said in its 2020-21 economic outlook, as the restrictions enforced since March 18 now enter the sixth week. The third phase is scheduled to end April 28.

“It is known that the longer the containment policy (lockdown) is maintained by the Malaysian government beyond April 28, the deeper will be the recession in 2020,” it said in statement.

“We had previously estimated that any extension of MCO by two weeks from April 14 could lead to economic contraction by 2 per cent of GDP growth.”

With just five days left to the end of its third phase, the government has yet to indicate if it will lift or relax some aspects of the MCO.

But the Ministry of Health said yesterday any plan to reopen the country is contingent upon the authorities’ ability to meet certain conditions, such as tightening borders to prevent import cases and having adequate healthcare capacity to deal with a surge in infections.

MIER said loosening some restrictions could help cushion the recessionary impact expected to hit the economy this year, and that it expects a gradual lift of the MCO starting next week in light of the plateauing number of new positive Covid-19 cases.

“Malaysia may soon reach the peak of the accumulated total cases and presage the beginning of the flattening of the Covid-19 curve, signalling positive results from the MCO lockdown strategy,” it said. 

“The question for policy makers is when to begin to ease the lockdown restrictions.”

The Covid-19 pandemic has already prompted Putrajaya to revise its 2020 GDP forecast downward, between -2 and 0.5 per cent, although it estimates growth to pick up and bounce back at a much faster rate next year. 

MIER said based on its most optimistic projection, economic activities including trade and investment are likely to rebound “fully” by the third quarter of this year, and spill over through 2021. 

But any chance of a full recovery will also be dependent on how the country’s global trading partners perform in the next few months. 

Only China, Malaysia’s third-largest trading partner, has so far shown signs of recovering after Beijing began to loosen restrictions earlier this month. The communist republic, where Sars-CoV-2 originated from, is a key export destination for most Malaysian small and medium enterprises (SMEs). 

“They are starting to do business again so there’s hope that maybe things will pick up, especially for Malaysian SMEs who form the supply chain,” Tan Sri Kamal Salih, MIER’s lead economist for, said in a teleconference co-organised by consultancy, Vistage.

In a worst-case scenario, production and trade may not fully recover by the fourth quarter, and could extend into April 2021l, it predicted.

“For both scenarios, we take into account the government’s Prihatin total stimulus package of RM260 billion, with the supposition that only 20 per cent of the non-fiscal injection (RM225 billion) will be realised into new capital formation across the economy. 

“As the economy plummets under MCO (phase) one to three, we further assume a disequilibrium in the Malaysian labour market for 2020 and 2021.”

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