Economic recovery to continue in second half
MALAYSIA’S economy in 2022 is expected to expand at the upper end of the range of 5.3% to 6.3%, even after taking into account the slower global growth, according to Bank Negara governor Tan Sri Nor Shamsiah Yunus.
“The growth is supported by private sector spending amid higher tourist arrivals and the recovery in labour market conditions, which will more than offset the moderation in external demand,” Nor Shamsiah says at a media briefing.
In the second quarter, the economy saw higher growth of 8.9%, driven by domestic demand as the economy transitions towards endemicity.
Growth in the first half was 6.9%.
“Going forward, the Malaysian economy is projected to continue to recover in the second half of 2022, albeit at a more moderate pace amid global headwinds.
“Growth for the rest of the year and 2023 would be driven mainly by private sector expenditure, particularly as tourism sectors normalise towards pre-covid levels.
“Investment activity stands to benefit from the realisation of multi-year projects such as the Mydigital, East Coast Rail Link and the Light Rail Transit Line 3,” says Nor Shamsiah.
She noted that robust employment had supported growth in the second quarter.
“Jobless claims fell significantly and rehiring of retrenched workers remained relatively strong.
“High frequency data from the Social Security Organisation indicated a continued decline in layoffs and relatively strong hiring activity in the second quarter,” says Nor Shamsiah.
Private sector nominal wages also saw higher growth of 7.8% in the second quarter.
“Going forward, continued expansion in economic activity is expected to lead to a broader recovery in the labour market,” she says.
However, the central bank recognises that economic recovery is uneven and improvement in some segments have continued to lag behind others, with 20% of the economy still below pre-pandemic levels.
Nor Shamsiah says this is most severe in the construction sector due to labour shortages and higher input prices, while tourism-related industries have only recently begun to recover.
She also noted that on the external front, global growth would be weaker than earlier forecast due to higher inflation, more severe impact of lockdowns in China and tighter monetary policy.
“Being a small and open economy, this slowdown would have an impact on our exports. Nevertheless, Malaysia’s diversified exports structure across products and markets will help us face potential shocks in demand for any specific products or from any specific countries.”
Meanwhile, recent data shows Malaysia’s gross exports continued to register double-digit growth.
This was supported by higher demand for electrical and electronic (E&E) products as well as firms’ adaptability to mitigate supply chain disruptions.
Higher commodity prices provided a further impetus to Malaysia’s exports.
Nor Shamsiah says that going forward, demand for E&E products is expected to remain firm, in line with industry projections in 2022 and 2023.
“Our engagements with the industry also affirm that firms have been taking proactive mitigation measures to minimise the impact from the supply chain disruptions.
“This includes the building of buffer inventories as reflected in the strong intermediate import growth for the second quarter,” she says.
She points out that compared to 2021, headline and core inflation for 2022 are expected to average higher, reflecting improvement in the economic activity amid higher costs.
Nonetheless, Nor Shamsiah says the extent of upside pressures on inflation are expected to remain partly contained by existing price control measures, fuel subsidies and the existence of some spare capacity in the economy.
On interest rates, she says monetary policy would remain accommodative this year to support economic recovery.
In July, the central bank increased the overnight policy rate (OPR) by 25 basis points to 2.25% amid positive growth prospects for the local economy. The OPR was first increased in May.
“With the recovery in domestic demand, we are seeing some early signs of demand-driven inflation. As such, the recent OPR adjustments would also pre-emptively manage the risk of excessive demand on price pressures.
“This is important because whenever the inflationary pressures are excessive, it is more damaging to the economy and causes even deeper hardships for the people compared to a gradual increase in policy rates,” she says.
Also present was chief statistician Datuk Seri Dr Mohd Uzir Mahidin, who notes that in the second quarter, the country’s current account of the balance of payments registered a higher surplus of Rm4.4bil, or 1% of gross domestic product (GDP).
This was supported mainly by the smaller primary income deficit, driven by higher income generated by Malaysian firms investing abroad.
In addition, the services deficit narrowed, supported mainly by higher travel receipts amid reopening of international borders.
In the financial account, net foreign direct investment recorded an inflow of Rm17.3bil during the quarter, mainly into the manufacturing sector and financial services sub-sector.
Nor Shamsiah points out that Malaysia’s strong external position provides resilience against external shocks.
“This is supported by a sustained current account surplus; higher foreign-currency external assets relative to foreign-currency external liabilities; and adequate international reserves.”
While credit risk remains elevated amid the gradual expiry of relief measures, the banking system remains well-positioned to support household and business financing needs or debt restructuring as the economy recovers.
Nor Shamsiah says banks continue to remain prudent in loan provisioning practices to account for higher credit risks.
“Nonetheless, the accumulation of additional provisions are likely to be more modest, given the sizeable buffers already built up over the past two years.
“Banks also continue to maintain strong capital and liquidity buffers to absorb potential losses and support intermediation needs,” she says.
According to the central bank, net financing grew by 4.9% as at end of the second quarter.
Outstanding business loan growth improved to 5.5% in the second quarter while for households, loan growth increased to 5.7%.
“Growth in loan disbursements and repayments also improved amid higher demand for loans and the gradual lapse in repayment assistance programmes, respectively,” says Nor Shamsiah.
As at end-june, outstanding financing to micro, small and medium-sized enterprises (MSMES) also expanded at a faster pace of 7.5%.
“Financing activity continued on a strong momentum during the second quarter, with disbursements trending at much higher levels than before the pandemic.
“This has supported MSMES’ higher needs for working capital as businesses recover and expand amid the firmer growth trajectory while also faced with rising costs,” she adds.