The worst seems to be over for Malaysia but not out of the woods yet

By Jamari Mohtar

Despite the gloom and doom that was exacerbated by the recent announcement of the worst economic performance of Malaysia and Singapore, it’s not the end of the world yet for both countries especially Malaysia. All it means is, although we are not out of the woods yet, the worst seems to be over.

In the second quarter of the year (2Q20), Malaysia recorded a deep contraction of 17.1% gross domestic product (GDP) growth – exceeding Singapore’s contraction of 13.2% which is also its worst performance.

Fitch Solutions Country Risk and Industry Research, a unit of international ratings agency Fitch Solutions, expects economic activity in Malaysia to pick up again in the second half of the year (2H20) as MCO measures are expected to be further eased in the coming months, barring a recurrence of the worst Covid-19 infections.

“Similar to other Asian economies such as Singapore, we believe that the worst has passed for Malaysia in terms of the recession and in the absence of a second wave of Covid-19 infections, a recovery, albeit slow and fragile, is set to commence in 2H20,” the research unit said.

In simple term, it means the bottom (trough) has been reached. Whenever a trough has been reached, under the economic theorising of ceteris paribus (everything else remain constant), the GDP growth curve will have nowhere else to go but upwards, denoting the worst is over.

But of course, in real life ceteris is not always paribus and in this case, the occurrence of a second wave of the virus attack will throw a spanner in the works of the government for a speedy economic recovery in the form of a V-shaped recovery.

Thus, the responsibility of ensuring a speedy economic recovery does not lie on the shoulder of the government alone, as the second wave will definitely occur if the SOPs devised by the government during the Recovery Movement Control Order (RMCO) are wilfully and trigger-happily flouted by the rakyat.

But let us for the moment assume the second wave does not materialise. Any sane person will know that the 2Q20 result which consists of the months of April, May and June ought to be relatively bad, despite the best efforts of the government in the recovery of the economy.

How can one expect a scenario of a contraction of 1% to 5% or for that matter a contraction of 5% to 7% when there was a total lockdown of the economy from March 18 and partially lifted on May 4 when the Conditional MCO was implemented?

And even under the CMCO, although the economy was partially opened, people were still afraid to venture out because of the fear the coronavirus might just be lurking around the corner near them.

When the turning point of implementing the Recovery MCO started on June 6 with more opening of the economy, in the beginning people were still reluctant to spend, because of the fear of more bad time to come and instead started to save for rainy days, leading to the paradox of thrift in economics.

This paradox in turn, could lead to the liquidity trap in which the monies that the government were putting in the pockets of the rakyat were not spend, thus driving down consumption spending, which is one driver of economic growth.

And this is borne out by the Department of Statistics when the compilation of GDP for the first time is further improved in 2Q20 with the introduction of the additional estimation of monthly GDP in measuring the current economic performance.

This is very innovative similar to Singapore introducing a flash estimate all this while on its quarterly GDP by announcing it much earlier based on the estimated first two months of each quarter.

In the case of Malaysia, based on these monthly estimates, the sharp decline in the economy was observed in April with a contraction of 28.6% of the GDP, while in May it contracted to 19.5%, and a further improvement in June with a small contraction of 3.2%.

Furthermore, the slower contraction in June was observed in all sectors with the exception of the manufacturing and agriculture sectors which posted a positive growth of 4.5% and 11% respectively. Other sectors posted a slower contraction – construction, 12.7%; mining & quarrying, 16.4%; and services, 6.0%.

This observation is supported by the June data on unemployment (4.9% as compared to May’s 5.3%); exports bouncing back (an increase of 8.8% to RM82.9 bil in June from May’s decline of 25.5%); trade surplus widened by 98.7% to RM20.9 bil in June (the largest ever recorded compared to the previous largest trade surplus in October 2019 with a value of RM17.3 bil); and Manufacturing Purchasing Managers Index (PMI) of 50.0 for July, beating estimates of analysts at 49.0.

Mind you, all these figures are not projections but actual, latest figures and a standalone figure for the respective month. While the 2Q20 result, which is also an actual, latest figure has two other months dragging it down i.e. April and May.

It remains to be seen whether the latest standalone figure for July’s actual unemployment data, July’s actual exports figure; July’s actual trade surplus, and August actual PMI figure (all to be released bin September) will be on an increasing trajectory.

There will always be a lagged effect between projected and actual figures because of the need for data collection and analysis but what’s more important is not to make a hue and cry over quarterly figure, rather it is the annual figure that matters.

On this basis, Fitch Solutions forecasts the Malaysian economy to contract 4.5% for 2020, and grow by 6.3% in 2021. But remember these are projections and the actual figures could be less, more or the same as the projected ones.

It’s analogous to a war tactic and strategy – it’s ok to lose some battles as long as you win the war by winning the mother of all battles. This means it is ok to have some negative quarterly GDP growth (the battles) however deep the contraction is, as long as you are triumphant in the mother of all battles, which is the annual, actual GDP figure.

The rest, as they say, are collateral damage that comes with the war on the Covid-19 pandemic.

In the beginning of my article I seem to imply Malaysia is in a relatively better position than Singapore although its 2Q20 GDP is worse than the republic. This is because Singapore has already experienced a technical recession defined as two consecutive negative quarterly growth while Malaysia has not.

But don’t underestimate Singapore because there were many times in the past when analysts seemed to have written off the island-city economically, yet it rebounded with a new vigour, confounding them.

Jamari Mohtar is director of media & communications at EMIR Research, an independent think-tank focused on strategic policy recommendations.

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