Covid-19 pandemic could tip Malaysia into technical recession

26 Mar 2020 / 22:11 H.

PETALING JAYA: Although the effects from the Covid-19 pandemic are expected to taper off by the end of the second quarter this year, Malaysia could slip into a technical recession, exacerbated by the ongoing external headwinds and domestic challenges.

The domestic economy is projected to contract in first-quarter 2020 (Q1 2020) by 2.8% – the first contraction since Q3 2009. For Q2, it is expected to shrink 1.8%, according to AmResearch.

“The adverse impact is expected to be felt across all the economic activities following a ‘partial’ lockdown by the new government in view of the increasing severity of the virus impact,” it said in a note.

The research house said even prior to the outbreak of the coronavirus, the manufacturing sector has been in recession, impacted by the trade tensions between the United States and China.

Following the outbreak of the novel coronavirus, there has been a severe disruption of global supply chain and shipping as well as total trade.

There has also been downward revisions to the country’s gross domestic product (GDP) growth forecasts to between 3.2% and 4.2%, and the fiscal deficit upwards to 3.4% of GDP from 3.2% under Budget 2020.

AmResearch pointed out that major trading partners such as the US and China are poised to be in recession in first half 2020.

“The E&E sector will continue to be impacted by the global semiconductor downcycle. Falling oil and commodity prices plus financial market volatility will weigh on the domestic economic performance,” it said.

That said, a normalisation of the domestic economy is more likely to take place in the second half of this year, just like the global economy.

“Coordinated efforts by the global economy, including Malaysia, to support growth through monetary and fiscal stimulus measures should start yielding positive results.

“And by which time, the ‘partial’ or ‘total’ lockdown would have been lifted as the virus impact eases globally. Our full-year GDP growth for Malaysia is 0.4% with the downside at -1.1%,” it said.

In a separate note, CGS CIMB Research said the decision to implement the four-week movement control order (MCO) reduces its 2020 GDP forecast by 5.9 percentage points from 3.6% to -2.3%, a steeper contraction than during the global financial crisis, when Malaysia’s economy shrank 1.5% in 2009.

“We estimate that each weekly extension beyond 14 April will subtract a further 1.3 percentage points from our revised baseline forecast,” it said.

Given the significant downside risks to the economy arising from Covid-19 and the extended MCO, the research house expects Bank Negara Malaysia to ease monetary policy again by 25-50 basis points by May.

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