Will it be a L, U, V or W?

MALAYSIA’S first quarter (1Q20) GDP data released on Wednesday, which came in at 0.7% year-onyear (y-o-y) growth was way above expectations as the market was looking at a contraction of 1% for the period.

The stronger than expected Q1 data was boosted by perhaps a smaller than expected drop in the services and manufacturing sectors, although the pace of growth in the two key sectors dropped by more than half on a y-o-y basis.

On the demand side of the economy, the surprise came from the government’s consumption expenditure, which expanded by 5% y-o-y but net exports for the Q1 period saw a steep 37% plunge while total investments were also lower by 4.6% y-o-y. Private consumption, which accounts for nearly 58% of the economy, held steady at a 6.7% growth y-o-y, perhaps due the some front-loading of consumption prior to the movement control order (MCO), which commenced on March 18.

With the 1Q20 economic data out of the way, economists are now focusing on the larger and longer term impact from Covid-19 and the impact of opening up the economy almost fully under the conditional MCO (CMCO) since early this month.

Based on current forecast, the market is looking at a GDP forecast that range from as low as -6% to as high as -1.1% with a mean forecast of -3.5%.

The market forecast is outside Bank Negara’s current guidance of full-year estimate of -2% and +0.5% as the central bank did not provide a revised guidance post 1Q20 GDP data and will likely do so after the next quarterly period.

While GDP could very well reach -3.5% as forecast by the market, the issue is the path that the economy going to take from here on as there are many assumptions and variables involved, both internally and externally.

Most people are familiar with the much talked about V-shape recovery which basically suggests that the economy will see a deep dive in Q2 before rebounding strongly in Q3, driven by the return of confidence among consumers and businesses. This is on the assumption that as the economy opens up, the incidence of new positive cases becomes rare while the number of deaths drops drastically.

In this scenario, the opening up of the economy and embarking on

CMCO was a right decision as Malaysians adopted to the new normal in their everyday life with social distancing, wearing of protective gears and reducing travels to those that are only deemed necessary. Under this scenario, we are also able to reduce the incidence of positive cases to perhaps a single digit or even zero.

Post 3Q20, the economy returns to normalcy and Covid-19 has passed. In essence, the V-shape recovery can be said to be the bestcase scenario.

Another popular belief is that while we open up the economy and as we return to our routine, the new normal is not as easily adopted by all and thus resulting in a second wave of transmission. This is also evident in several other countries where there are incidences of fresh Covid-19 cases. This causes disruption to the economy and just as the economy was about to return to normal, it hits another wall and turns south again.

In this scenario, the economy returns to positive growth in Q3 but turns negative again in Q4. As the secondary Covid-19 wave is potentially contained within that Q4 period, the economy is opened up yet again to allow life to return to some form of normal, call it “the new normal of the new normal”. The economy then rebounds in 1Q21 and since the general population is made more aware of the way to adopt in the second wave, the economy is better protected. The economy would see much stronger recovery thereafter and life resumes to positive growth by 1Q21. This is the “W” scenario.

The “W” scenario can potentially turn into a “L” scenario if the second wave of Covid-19 pandemic is not contained despite the re-imposition of MCO across the nation. The cause of this would likely be the failure to adhere to strict health measures, which includes mini-gatherings, failure to practise social distancing and opening up of the economy which resulted in more movement among the population.

In this scenario, Malaysia remains under a prolonged period of MCO and as the cases mount, our healthcare system is put to the test and to the limit, due to a significant and sudden increase in the number of cases. In this scenario, domestic demand will be severely curtailed for a foreseeable future and the economy, after falling off the cliff in Q2, remains grounded, as there is a lack of demand while strict MCOS curtail output and supplies.

This could last for at least another three to four quarters before the economy is able to get back on its feet. In this scenario, the economy will likely be in contraction for a total of up to five quarters.

The “L” scenario can be said to be the worst-case scenario. It is widely believed that we may experience a “U” scenario for the economy. In this scenario, the economy remains in contraction for at least two to three quarters as it takes time for the economic engine to get back to full throttle.

After the deep dive in Q2, the economy remains challenging in Q3 as many businesses are cautious in opening up to meet market demand as consumers themselves are concerned about their spending habits due to a lack of confidence in terms of job security and income.

In this scenario, there could be a second wave of Covid-19 cases but they are isolated and not damaging to the economy on the whole.

The “U” scenario means we will observe at least three consecutive quarters of economic contraction on a year-on-year basis. As some form of confidence returns towards the end of Q4, economic momentum improves in Q1 of 2021 and full recovery is only seen from Q2 or Q3 of 2021 onwards as Covid-19 takes a back seat following the discovery of a vaccine that could protect mankind.

With the consensus view of a 3.5% GDP contraction this year for Malaysia, it is likely the shape of this recovery is that of a “U” shape as not only Malaysia tries to balance between lives and livelihood, so does the rest of the world.