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New Covid wave weighs on Malaysia’s growth

Skyline Kuala Lumpur, Malaysia

Malaysia’s central bank has slashed its 2021 economic growth forecast for the second time, due to a resurgence in Covid-19 infections followed by new lockdown measures. The Bank Negara Malaysia now sees Malaysia’s economy growing 3%-4% this year, down from an earlier estimate of 6%-7.5% growth.

The decision follows the announcement of Malaysian Gross domestic product (GDP) figures, which grew 16.1% in the April-June period, helped by an improvement in domestic demand and robust exports. This marked the first GDP growth since the first quarter of 2020 when the economy expanded 0.7%.

The Q2 2021 GDP figures were also a correction from the steep 17.1% decline in the corresponding second quarter of last year, its worst contraction in over two decades.

Malaysia’s central bank added that strong growth in the second quarter of 2021 reflected the low base from the significant decline in activity during the second quarter of 2020. Moreover, on a seasonally adjusted basis, Malaysia’s economy shrank 2% in the second quarter compared to the previous three months. This was led by restrictions since May to curb a new wave of infections.

Elsewhere in Southeast Asia, Singapore revised up its second-quarter GDP growth to 14.7% in Q2, and also upgraded its 2021 growth forecast to 6% to 7%. Meanwhile, the Philippines reported quarterly growth of 11.8%, Indonesia logged 7.1%, and Vietnam 6.6%.

Malaysia future growth outlook

Malaysia is still fighting the Delta wave, recording high levels of cases and deaths in recent weeks. The government has eased restrictions for several states since July and recently for those that are fully vaccinated, but Kuala Lumpur and Johor remain under restrictive measures.

“Economic performance was supported mainly by the improvement in domestic demand and continued robust exports performance. Malaysia’s growth recovery is expected to broadly resume in the latter part of the second half of 2021 and improve going into 2022,” Bank Negara Malaysia’s Governor Nor Shamsiah Yunus said. She later added that the bank’s monetary policy will remain accommodative and that it has the policy space to respond further if necessary.

Malaysia’s pace of vaccination rollout has made significant progress. According to the health ministry data, around 71% of the nation’s adult population has received the first dose of the vaccine, while 42% have completed both doses, with the government aiming to fully vaccinate the entire adult population by October.

“Nevertheless, the expected re-opening of the economy would support a gradual recovery in the fourth quarter this year, with higher global growth and sustained policy support providing a further lift to economic growth,” the central bank statement read.

The International Monetary Fund projected Malaysia’s GDP down by 1.8 percentage points at 4.7% for 2021, while the 2022 real GDP growth forecast was kept unchanged at 6%.

According to Sian Fenner, Lead Economist at Oxford Economics, Malaysia’s GDP came in much weaker than expected in Q2, falling 2% quarterly.

“We expect elevated Covid-19 cases will delay a broader easing of restrictions under the government’s national recovery plan. A sharp acceleration in the vaccination rate bodes well for a more substantial easing in Q4. We expect the recovery to get back on track, supported by accommodative macro policies and firmer external demand. But the spread of the more virulent Delta virus still poses a significant downside risk to our growth forecasts”, Fenner added.