Malaysia moved into technical recession during Q3 2021 due completely to the lockdowns and unless derailed by Omicron, we may finally be turning toward low and fragile growth
DECEMBER 1 — As we had pointed out in our commentary on the latest economic performance data for Q3 2021, Malaysia is in a technical recession which is defined by the US Federal Reserve as two successive quarters of economic contraction.
It is the second time in two years that this has happened and in both cases the the cause is clearly the lockdown policy imposed by the government. This has been noted recently by former prime minister by Datuk Seri Najib Razak and it deserves some attention when politicians recognize the implications of the overreaction of the lockdown measures.
However as is often the case in economics, the story is not quite so simple. Malaysia’s economic slowdown started well before the Covid-19 shock with weak growth in Q3 and Q4 of 2019. It became worse after the first lockdown caused the recessionary phase in Q2 and Q3 last year. The deep 17.2 per cent contraction of GDP year-on-year in Q2 2020 made Malaysia one of the worst performers in the top six Asean economies.
The lockdowns in 2021 repeated the 2020 experience with GDP contracting in two successive quarters by 1.9 per cent quarter-on-quarter or 16.1 per cent year-on-year in Q2 and 3.6 per cent quarter-on-quarter or 4.5 per cent year-on-year in Q3.
When compared with the top six Asean countries the impact of Covid-19 has been worse in Malaysia for three main reasons. First, the lockdowns in Malaysia have been relatively longer and stricter than elsewhere and this has caused structural damage to businesses, employment, income and savings which affected recovery prospects.
Second, the government stimulus packages have not been as large or as effective as they had been presented. Around half of the total allocation was not used quickly or at all and around half of what was used came from private sector sources such as the EPF withdrawals. In addition, the “targeted” as opposed to a universal approach was inefficient.
Third, Malaysia has been caught by Covid-19 in the middle of a structural transformation of the economy, substituting its engine of growth from investment to consumption and from the industrial to the services sector.
This structural change is a long-term trend that often happens as economies progress through successive phases of development. In Malaysia this process has been somewhat forced by previous governments and successive Malaysia Plans involving a progressive, relative reduction in funds to support public investment in all sectors of the economy apart from services.
Private investment and foreign direct investment (FDI) inflows have followed the same trend. Aggregate FDI inflows fell by half in 2018 and half again in 2019, only recovering the previous levels in 2020. FDI in agriculture contracted significantly in 2017 and 2018 saw a contraction in construction and real estate. In 2019, FDI in manufacturing was the underperformer. Net FDI has been in trend decline since 2016.
All of this was before the Covid-19 crisis and the current government. Indeed, it has its origins before the current and previous two prime ministers. Together this has reduced the fuel needed for the engine of investment to help the economy grow.
At the same time, there has been a shift to consumption which is powerful in pushing economic growth but it is not able to promote robust and sustained growth over time by itself. We must also remember that the structural impact on incomes and savings means that there is very little pent-up consumption.
We have also seen a significant increase in unemployment and underemployment which has become a structural feature of the Malaysian economy. Again, we had seen this before the Covid-19 crisis but it has certainly been made worse by the lockdowns and employment recovery policies have the same ineffective targeting approach as before.
A word on inflation is also appropriate because price rises, especially for meat and vegetables, have become an issue of public concern and debate. Contrary to the consensus, we expect inflation will be kept at bay, around 2.4 per cent in 2021 falling to the normal 2.0 per cent in 2022. Despite the headline figures which are affected by oil-price effects and lockdown-induced supply shortages, both of which are temporary, inflation has been and will remain persistently low.
Core inflation for example has been stable at around 0.7 per cent and may reach 1.5 per cent in 2022 but persistent labour market slackness will moderate wages and price controls, especially on petrol will help on the other side. Based on this we see no particular need for Bank Negara to change interest rate policy in the near future.
So there are three points to note about the current position of the Malaysian economy. First, we are at a turning point moving from a technical recession into slow and fragile growth. From now on we expect to see a recovery phase but slower than expectations and certainly not 6-7 per cent forecast by others. Growth will more likely be around half of this in 2.5-3.5 per cent range.
Second, we do not have a balanced growth model in Malaysia with recovery likely to be pushed by consumption not investment. The impact of the Covid-19 crisis has caused significant structural damage which needs investment to put right. Without that, the damage of the past will impact growth prospects in the future and high growth, while possible, is not coming back any time soon, unless investment improves.
Third Malaysia is likely to emerge from the crisis as worse performer among the larger Asean countries and if as has been predicted already the move to the endemic phase is postponed by the Omicron variant the transition to slow and fragile recovery may be derailed, especially if the same futile policy of lockdowns re-emerges.
* Dr Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist at Malaysia University of Science and Technology. The views expressed are those of the writers.
* This is the personal opinion of the writer or organisation and does not necessarily represent the views of Malay Mail.