Domestic demand, spending on the mend as restrictions ease
DOMESTIC demand is expected to continue be the main anchor of growth for the local economy.
On the demand side, growth in 2022 is expected to improve, underpinned by the continued recovery in private sector expenditure while private consumption is expected to expand by nine per cent in 2022, BNM stated.
“This is anchored in the continued improvement in labour market conditions. In addition, the absence of strict containment measures would provide a lift to household spending.
“The rise in online spending since the onset of the pandemic in 2020 is expected to continue and will further spur private consumption.
“The materialisation of some pent-up demand for selected discretionary items which were previously restricted due to the imposition of containment measures is also expected to provide some support to overall spending.
“These include discretionary spending on restaurants, hotels and recreational activities.
“The strength of the pent-up demand, however, is subject to the path of the epidemic situation in Malaysia,” it added.
According to a report by the research team at Kenanga Investment Bank Bhd (Kenanga Research), based on the Malaysian Institute of Economic Research (MIER) Consumer Index, consumer sentiment is seen as rising as restrictions have eased, fuelled further by the reassurance from the accelerated vaccines roll-out and booster shots.
“The National Recovery Phase in mid-September 2021, was a welcome boost to our Consumer Stock Universe as earnings surged 97 per cent q-o-q and 42 per cent y-o-y partly coming from a low base effect,” it noted.
However, it pointed out that global and domestic economic momentum saw rising economic challenges - rising input and logistics costs as supply tries to cope with rising demand.
“New geo-political tensions stoked further inflationary pressures as energy prices surged.
Global economic indicators showed that input prices are likely to remain elevated, in fact even rising in the coming months which will pose risks to earnings, indicating that pre-pandemic level margins is still a long way off,” it said.
Nevertheless, Kenanga Research was positive on robust top-lines ahead with economic activities accelerating as we move farther into the endemic phase.
“Input prices will be at elevated levels as global economic recovery accelerates which give rise to a variety of challenges – inflation risks arising from rising input prices coupled with higher freight costs as supply tries to cope with rising demand and upsurge in labor costs arising from shortage and the implementation of the minimum wage.
“With raw materials prices seen to rise by 10-20 per cent in 2022, it is expected that producers will pass the rising costs to consumers but unlikley at a quantum enough to offset elevated inputs prices.”
The MIER Consument Sentiment Index has showed improved sentiments since midSeptember 2021 as the national Recovery Phase took effect.
Driven by the reopening of the economy and pent-up demand, this improved sentiment looks likely to hold ahead. More so with BNM pledging to keep interest rates at an accommodative level to support the nascent economic recovery.
Meanwhile, MIDF Research pointed out that Malaysia’s labour market has improved further as employment increased 2.9 per cent y-o-y in January 2022, the biggest gain since June 2021.
“As overall economic activities stay in recovery mode, total unemployed persons fell further by -13 per cent y-o-y in January 2022, the largest contraction rate ever recorded.
“Jobless rate remained at pandemic low of 4.2 per cent. Resumption of domestic spending and continuous upbeat momentum of external demand, as well as elevated commodity prices, were among key supportive factors for the recovery in labour market.
“In addition, we expect smoother labour market recovery in 2H22 as Malaysia’s international borders to fully reopen on April 1, 2022.
“Hence, we shall see the return of non-citizen employment this year after more than 100K foreign workers left the job market during the pandemic years,” it said.
“Looking ahead, we view Malaysia’s labour market to continue on steady recovery pace as indicated by the steady pickup in job-to-vacancy rate which hit a new record high at 47.1 per cent in December 2021.
“Apart from international borders reopening, Malaysia’s solid macro fundamentals are set to support the overall economic growth as well as labour market in 2022,” MIDF Research projected.
As such, Malaysia’s consumer spending is expected to be on a strong footing underpinned by steady recovery in labour market, broadly stable inflationary pressure and fiscal incentives.
“On top of that, the government has given the permission for extra EPF withdrawals up to RM10,000 which will be disbursed in Apr22 onwards. In the same month, international borders will reopen and we shall see gradual return of foreign tourists to Malaysia.
“We believe services sector, such as retail trade and hotel & accommodation industry will benefit the most with these current developments, recovering stronger after almost two-years of limited activities,” it said.
Nevertheless, it cautioned that for industry players in the consumer sector, rising raw material prices could be a key challenge.
“We note that the rising raw material prices, freight charges, uncertainties with Covid-19 pandemic, as well as the RussiaUkraine war will continue to be a key risk factor for the sector.
“The prices of wheat, corn and soybean increased significantly from February due to supply disruption concerns related to the war.
“Moving forward, we believe that the rising prices of raw commodity goods will impact the profit margin of companies in the sector. As such, some of the consumer staple companies have started to pass the higher costs gradually to the consumers since last year to reduce the margin pressure.
“However, we think this would only be conducted marginally and in stages to ensure the companies retain its market shares due to high competition and pricing control mechanism for staple food items such as eggs and chicken.”
The high prices of basic necessities and consumer goods could also affect the purchasing power of households, which would lead price sensitive consumers to switch to affordable options.
“This was evident in the latest Consumer Sentiment Index (CSI) data by Malaysian Institute of Economic Research (MIER) for 4Q21 which showed that the index fell below the optimum 100-point threshold level after rising in the earlier quarters.
“This was due to the uncertain job market then as well as concern about the rising prices.
“However, according to the recent labour market data for January 2022, employment increased by 2.9 per cent y-o-y, recording an eight-month high employment growth.
“With this encouraging labour market data coupled with lower jobless rate, we expect the CSI will improve in the next quarter with the transition to endemic stage.”