The Malaysian economy is still healing under different phases of movement restrictions to flatten the third wave of the coronavirus infection which has risen to high levels since September 2020. A welcome relief is the arrival of the vaccine in February, paving the way for the first phase of the vaccination programme in February-April 2021. The effective and accelerated rollout of the vaccination programme holds the key to lifting sentiment and aiding the uneven state of economic and business recovery.

While it may be hard to confidently say that the Malaysian economy is getting better, some say that the worst of the COVID-19 pandemic is behind us with the availability of the vaccine. Even though there is data that suggest that the economy is now on a path of mixed improvement, many people and businesses feel discouraged and frustrated.

Since 4Q 2020, a resurgence of the third wave of the virus spread and Conditional MCO have had scarring effects on economic and business activities. The economic output, as measured by the Gross Domestic Product (GDP), continued to decline by 3.4% yoy in 4Q 2020, moderately higher than 2.7% in 3Q.

The health pandemic crisis has caused our national output to regress two years. The full-year real GDP declined by 5.6% to RM1.34 trillion in 2020 from RM1.42 trillion in 2019 (2018: RM1.36 trillion). Nominal GDP at current market price contracted by a larger magnitude of 6.3% to RM1.41 trillion in 2020 from RM1.51 trillion in 2019, and was lower than nominal GDP value of RM1.45 trillion in 2018.

The services sector, the largest contributor to the total economy (57.7% of GDP in 2020), is still struggling to heal, especially the travel, tourism and retail sub-sectors. A resurgence in coronavirus infections has weighed on consumer spending as demand for food and beverages, accommodation, transport and communication has declined by between 23.1% yoy and 61.2% yoy in 4Q 2020. Retail sales also dipped by 3.1% yoy in 4Q compared to -2.4% in 3Q 2020.

The barely recovered domestic tourism also got hammered hard as hotel average occupancy rates have fallen to less than 20% during January to mid-February 2021. Even if the inter-state travel ban is lifted down the road, there is only so much that domestic tourism can fill the gap left by inbound international tourists. As international travel ground to a trickle, tourists’ absence continues to bruise entertainment and recreation, retail, hotels and restaurants as well as aviation sector. The exploring of “Travel Bubbles” and “Green Lane” with China, South Korea, Japan, and within ASEAN must be given priority once it is assessed that the reciprocal countries have the same level of low risk.

Scarring effects

Amid embarking on the vaccination programme, we expect the scarring effects from the less restrictive MCO 2.0 and CMCO to continue in 1H 2021, especially retail, hotels and restaurants as well as transport and communication. The less upbeat spending mood in the run-up to the Chinese New Year celebration in the month of February is a dampener on consumption.

We expect the disproportionate impact of the COVID-19 pandemic between the manufacturing (supported mainly by the export-oriented industries), construction (delayed and dampened by many virus clusters in construction sites) and services sectors (delayed recovery in travel and tourism-related sub-sectors). In other words, some are doing very well in the current COVID-19 environment while others are still struggling to recover from the initial devastating impact of the pandemic. Between March and September 2020, a total of 32,469 small and medium enterprises (SMEs) folded.

Private investment declined by 11.9% yoy for the first time in 2020 since 2008-09 Global Financial Crisis, and is expected to revive moderately as businesses and investors are in waiting mode, owing to cautious uncertainty on the future of the pandemic and the economic outlook. Thus, public investment via the budget expenditure has to be accelerated to generate amplifying effects on domestic demand and private investment.

Consumer spending

Consumer spending (59.5% of GDP) is one of the most closely watched data points within the GDP. Amid cautious sentiment and weak employment prospects as well as reduced income, household spending went down by 3.4% yoy in 4Q 2020, higher than the -2.1% in 2Q. In 2020, private consumption declined by 4.3%.

It is reckoned that consumers and businesses have been increasingly turning to the digitalisation and e-commerce platforms as well as making online transactions estimated at about 25% of total online transactions. Physical store sales and dine-in restaurants are still making a large proportion of the total sales.

The people are less likely to spend as much as they otherwise would have as they are worried about going out so as to prevent the spread of the virus. The “revenge” spending and pent-up demand will eventually revive if confidence returns on the back of accelerated vaccination, backed by a robust job growth.

The labour market is not out of the woods yet, with retrenchments and unemployment rates continuing to rise. After easing off to 4.6% in September from a record high of 5.3% in May, the unemployment rate ticked up to 4.8% in December 2020 (4.8% in November), equivalent to around 772,900 unemployed persons compared to around 520,000 persons before the pandemic. The Employment Insurance System (EIS) continued to register a high number of 8,334 persons losing employment in January and 5,939 persons as at 25 February 2021. In 2020, a total of 107,024 persons were out of jobs in 2020, some 267.0% higher than the 40,084 in 2019.

Unemployment

We estimate the jobless rate to reach 4.5% at end-December 2021 vs 4.8% at end-December 2020 due to:

(i) A long drag of recovery in the travel-related sectors;

(ii) Remote working arrangement which reduces demand for transportation services;

(iii) The tapering effect of government intervention; and

(iv) The COVID-19 probably exacerbating skills mismatch due to the adoption of manpower-saving processes and technologies.

Exports offer a bright economic spot, thanks to the sustained demand of electronics and electrical products, firmer palm oil prices and crude petroleum, rubber products, chemical and chemical products as well as optical equipment etc.

Exports of goods and services (61.6% of total GDP) are expected to cushion the overall economy while waiting for full-steam recovery in domestic demand.

-- BERNAMA

Lee Heng Guie is Executive Director of the Socio-Economic Research Centre (SERC).