TWO years after the start of the Covid-19 pandemic, the Malaysian economy is now emerging from its low after contracting 4.5% in the third quarter of 2021. It is on the road to recovery in 2022, supported by the reopening of the economic and social sectors.
The worst flooding in decades in some states tempered the recovery in late December 2021 and early 2022. We estimate that real GDP will increase by 5.2% in 2022, an improvement from the 3.4% estimated in 2021.
A recovery in consumer spending (some pent-up demand), helped by a gradual recovery in the labor market (the unemployment rate stood at 4.3% in October 2021 compared to 5.3% in May 2020) and the Expected strong rebound in public investment via a high allocation of development spending (RM75.6 billion) in 2022 will support a more solid economic recovery.
However, we warn that the increase in the cost of construction materials and the weak public implementation capacity as well as the shortage of manpower could delay the implementation of projects, resulting in slow disbursement of funds.
Since the economic reopening, the mood and general sentiment has turned positive as consumers are allowed to travel between states, which has helped domestic tourism. People mobility and traffic indicators have shown signs of recovery despite concerns about the Omicron variant.
Retail stores, recreation centers, grocery stores and malls, as well as workplace visits increased. Hotel occupancy rates have improved to around 40-50% in recent months, thanks to a pickup in interstate travel and local tourists.
Nonetheless, the resumption of international tourist arrivals (an average of 26.1 million per year in 2015-2019 and foreign exchange earnings of 80.7 billion ringgit per year during the same period) is deemed necessary to support a stronger growth in tourism and related services. .
Businesses are slowly returning to normal as owners are eager to restart and resume operations in pre-Covid state. Wholesale and retail sales returned to their highest level on record, rebounding 5.4% year-on-year (year-on-year) to RM 116.4 billion in October.
Motor vehicle sales rebounded 10.2% to RM14.2 billion, after double-digit months of decline since June 2021.
Exports performed strongly in the second half of 2021, with some months exceeding expectations due to sustained global demand and firming commodity prices.
It grew 25.7% year-on-year in the first 11 months of 2021, driven by electronics and electrical products, refined petroleum, metals, chemicals and chemicals manufacturing as well as petroleum oil. palm and related products.
We expect export growth to normalize to around 1.8% in 2022 (estimated at 24.5% in 2021), as shipments moderate from a high baseline of RM 102 billion per month in 2021. .
There remains lingering uncertainty about global growth due to the Omicron variant. Global supply chain disruptions are also expected to persist in the first half of 2022, due to the time needed for bottlenecks to ease and production capacity to expand.
The shortage of labor and the rising cost of raw materials also slowed the pace of production.
We would like to share our thoughts on the top five risks the country needs to be aware of in the domestic and global economy as well as in financial markets:
> The contortions of the Covid
The global economy and financial markets in 2022 are still likely to be susceptible to the Omicron variant, which spreads faster even though it cannot cause serious illness.
As preliminary data suggests, mutations of the Omicron variant may reduce the strength of double doses of immunity from reinfection vaccination. This is forcing a more rapid deployment of the booster dose vaccine against the virus.
The latest contortions from Covid may temper the overall picture of the global recovery if countries are forced to reimpose movement restrictions.
> The headwinds of the Fed’s policy
We think the Federal Reserve (Fed) is more worried about rising inflation risks. Her hawkish stance will accelerate the pace of the decline in bond purchases and she has signaled three rate hikes in 2022.
It is possible that the Fed will move even faster on interest rates if inflationary pressure does not ease in the future.
Other central banks have joined the Fed’s hawkish stance and are expected to remain very sensitive to inflation.
The Fed’s tapering and monetary tightening will lead to tighter liquidity conditions, financial volatility and a reversal of capital flows in emerging markets (equity and foreign exchange markets).
Financial volatility will trickle down to Malaysia through the financial channel and a lower ringgit against the US dollar.
> China’s slowdown
The Chinese economy is returning to a long-term deceleration. Authorities in Beijing have acknowledged that the economy is facing “triple pressure: contraction in demand, supply shocks and weakening expectations,” prompting liquidity and monetary easing to guide a soft landing.
He is still grappling with real estate issues and the fallout from sporadic Covid-19 lockdowns. The concomitant risk of the Omicron variant’s global spread could lead to a sharp economic slowdown in 2022. China’s zero Covid target means no compromise on lockdown.
As Beijing attempts to stop the contagion of the Evergrande debt fiasco, the situation still risks causing another sharp slowdown in China’s real estate and construction sector, which could dampen demand for minerals and raw materials like iron ore, oil and palm oil.
The market consensus expects China to experience 5% growth in 2022, down from the 7.1% estimated in 2021. It is estimated that for every 1% drop in China’s GDP growth. China, Malaysia’s economic expansion would decline by 0.3 to 0.5 percentage points.
> Pressure on costs and prices
We expect grumbling supply chains around the world, which have also driven prices up, probably not slackening significantly.
The prices of soft and hard raw materials have risen significantly while logistics and shipping costs have skyrocketed although they have moderated in recent weeks. This increased production costs and affected margins as well as profitability.
A current global shortage of chips has hurt production in a number of industries – from cars and consumer devices, to personal computers and smartphones – and that could last until this year.
Domestically, rising input costs, supply constraints, and labor shortages affect businesses and industries very differently, depending on their ability to absorb cost increases.
If businesses and manufacturers are unable to absorb these cumulative costs, some may have no choice but to pass them on to consumers in the form of higher consumer inflation.
With rising consumer prices, estimated at 3% in 2022 (compared to 2.5% estimated in 2021), and a higher cost of living in a context of a gradual recovery in the labor market and improved wages nominal, consumers who have already seen their income squeezed could replenish their savings and be more careful in their spending.
Bank Negara is expected to raise interest rates in the second half of 2022, although the timing depends on the growth path and inflation risk. A removal of monetary accommodation is necessary to rebuild the buffer zone and the increases must be done in small steps so as not to temper the path of recovery.
A prolonged period of low interest rates can induce financial imbalances by reducing the risk aversion of banks and other investors.
> The abolition of domestic aid measures and policy changes
The policy changes proposed by the government, including in fiscal matters, would have transient and permanent effects on supply and demand as well as changes in market sentiment on individuals, businesses and investors in financial markets in the country. their whole.
The 33% one-time prosperity tax on due corporate income exceeding RM100 million could put a risk of declining corporate profits this year and reduce dividend payments due to the tax hike.
Businesses face the challenges of managing increasing cost pressures even as they recover. It is expected that the relief and assistance measures (such as the rental tax reduction, the electricity allowance, the tax allowance and the freezing of the statutory contribution rate) will be updated in 2022.
The higher minimum wage and the proposed tiered levy in the future will increase operating costs.
Lee Heng Guie is executive director of the Center for Socio-Economic Research. The opinions expressed here are those of the author.