After ‘worst recession’ in Malaysia’s history, strong economic recovery expected in 2021, Fitch’s research unit predicts

(MMO) – Malaysia economic recovery in the second half of this year is expected to be gradual before bouncing back on its feet next year, having experienced the its “worst recession” recently, the Fitch Group’s research unit said.

Fitch Solutions Country Risk and Industry Research was explaining why it had decided to revise its forecast of real GDP or economic growth for Malaysia at -4.5 per cent for 2020, down from the previous figures of -2.8 per cent. It also revised its 2021 forecast for Malaysia’s real GDP from the previous 5.7 per cent to a more positive 6.3 per cent.

Key reasons for the Fitch research unit’s revision of the 2020 figures include the 17.1 per cent contraction of Malaysia’s real GDP in the second quarter of 2020 or from April to June as compared to the year before due to movement control order (MCO) measures, which the unit described as the “worst contraction in Malaysia’s history”.

It also said the -4.5 per cent outlook for Malaysia’s real GDP is due to forecasted weaker domestic and external demand in the second half of 2020 in line with expected continued restrictions on travel and movement.

Touching on the expected greater contraction in private spending by 2.0 per cent instead of the forecasted contraction of 0.8 per cent previously, the Fitch unit said in its report on its outlook for Malaysia: “The severe downturn in Q220 as well as continuing restrictions on gatherings and people’s movements will continue to weigh on private consumption as disposable incomes shrink and malls and entertainment venues see less traffic.

“Furthermore, travel restrictions are likely to remain largely in place, as negotiations to re-open travel are likely to be limited to essential business travel in 2020, with governments in Asia mostly taking a cautious approach towards the matter.

“Malaysia will therefore be still unable to count on a return of tourism to aid the recovery, and this is a severe limiting factor, since tourism is a key part of the economy, accounting for 11.5 per cent of GDP (in both direct and indirect impact) in 2019,” it said.

Domestically, the research unit predicts slower recovery for gross fixed capital formation or investments as local businesses will remain cash strapped throughout this year due to cash flow issues, while noting that government consumption is unlikely to pick up the slack in domestic demand due to fiscal constraints and a relatively modest spending package announced in March.

Malaysia’s economic recovery for the second half of this year is also expected to be slower, due to the expected weaker economic recovery in its key trading partners, the Fitch unit said.

But the Fitch Solutions Country Risk and Industry Research also expected economic activity in Malaysia to pick up again over the second half of 2020, in line with the relaxing of MCO measures that are expected to be further eased over the coming months.

“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 H220,” the research unit said in the same August 14 report, referring to the second half of 2020.

And for 2021, Malaysia is expected to record strong recovery in economic growth with the expected lifting of more restrictions on domestic movement and international travel.

“The easing of restrictions would pave the way for a private consumption led recovery in 2021, which we expect to contribute the lions share at 5.4pp out of the 6.3% growth we are forecasting.

“Furthermore, a more synchronised global recovery in 2021 will help to spur external demand, and boost exports,” it said, while also predicting that there may be faster growth in imports as compared to exports due to “exuberance in private consumption”.

“2021 is also likely to see investment return to growth as well, as domestic businesses gear up for the recovery beyond 2021 alongside a return of FDI as the region continues to undergo a re-configuration of supply chains,” it added, referring to foreign direct investment by its initials.

But the research unit noted that a new wave of Covid-19 cases could hurt the outlook for Malaysia, saying: “The emergence of a second wave of infections, both in Malaysia, and in a number of major economies around the world such as China and the US (which is already grappling with an aggressive second wave), remain the key downside risk to our 2020 and 2021 forecasts.”