In spite of stimulus, recession risks loom
KUALA LUMPUR: In spite of government’s efforts to provide stimulus packages in comba ing economic slowdowns by Covid-19, analysts forewarn of a recession on the horizon.
In view of uncertainty of the extent of the outbreak globally and domestically, Affin Hwang Investment Bank Bhd (AffinHwang Capital) expect Malaysia’s real Gross Domestic Product (GDP) growth to be in negative territory – possibly in the first and second quarter of 2020.
This was on the back of a sharp contraction in domestic demand and weak exports.
“In view of the negative impact on the country’s domestic demand, and global supply chain disruption on Malaysia’s manufacturing and external sector, we cut our real GDP growth projection down to minus 3.5 per cent for 2020, from an earlier forecast of 3.3 per cent,” it said in a review yesterday.
Notably, the last recession in Malaysia took place in 2009 when real GDP contracted by 1.5 per cent.
Kenanga Investment Bank Bhd (Kenanga Research) concurred with this view, slashing its own growh projections for Malaysia’s GDP as it said “the risk of a recession is imminent.”
“The severe and shocking impact on humans lives, the economy and financial market brought about by the Covid-19 pandemic is unprecedented. The International Monetary Fund (IMF) has declared that the coronavirus crisis has caused a global recession.
“The question now is how bad the recession will be,” it observed in a separate note. “Since it is still uncertain when the pandemic would subside, it is difficult to project how bad the economy would suffer.
“Our preliminary projection shows GDP growth would contract by 1.9 per cent in 2020 versus government’s previous target of between 3.2 to 4.2 per cent a er considering the impact of the Movement Control Order (MCO) which was further extended to a total of 28 days.”
The MCO would severely impact domestic demand, Kenanga Research said, as private consumption and investment would be hampered. Additionally, the pandemic is expected to further impact the services and manufacturing sectors via extensive supply chain disruption which has already been wedged by the USChina trade war.
“The collapse of crude oil price, amid tension between Russia and Saudi Arabia, and lingering domestic political uncertainty, would further weigh on economic growth in 2020.
“Though the stimulus package announced by the government may partly cushion the adverse impact of Covid-19, the external risk is higher now as the pandemic has also severely disrupted the economies of major trading partners,” it added.
In the short term period, AffinHwang Capital believed growth private consumption will likely drop sharply, due mainly to the MCO whereby people’s movements are somewhat restricted, with restrictions of people exiting/ leaving homes, closure of most businesses, as well as restrictions on entry of nonMalaysians into Malaysia.
With the enforcement of MCO, as an example of the impact, domestic consumers’ purchases of the latest electronic gadgets (such as smartphones and tablets) as well as all other household electricals and consumer and household items, are likely to be lower and negatively impacted.
Similarly, during and even after MCO enforcement, consumer spending for leisure-related expenditures, such as restaurant and hotel (food & beverage) outlets, and recreational services (movies/ theatres, concerts and fitness centres), will be affected somewhat.
In view of the negative impact on the country’s domestic demand, and global supply chain disruption on Malaysia’s manufacturing and external sector, we cut our real GDP growth projection down to minus 3.5 per cent for 2020, from an earlier forecast of 3.3 per cent. AffinHwang Capital
“In the near to medium term, private consumption growth will not be normalised as households will likely be impacted from possible temporary shocks to their incomes and a slight erosion of purchasing power,” it said.
“Households are also likely to be cautious on their spending due to the uncertain employment situation as well as affected by the expected slower growth in real disposable income.
“With a drop in commodity prices, if continue, those in the rural areas, and those involved in economic activities such as plantation, may have some impact on their incomes, therefore their contribution to consumer spending will be lower as well.”