Variants and inflation: There lies the rub in 2022

PETALING JAYA: In 2022, the health and pace of Malaysia’s economic recovery depends on two crucial factors – the Covid-19 coronavirus variants and the spectre of high inflation.

For the past two years, the Malaysian economy has been beholden to the Covid-19 pandemic and the ensuing movement restrictions to curb the spread of the coronavirus. While there has been great strides in inoculation across Malaysia, the possibility of further mutations emerging is expected to dictate the country’s recovery path.

Bank Negara Malaysia has said it will factor in a number of considerations such as inflation, pace of economic recovery and household lending, in addition to US Federal Reserve actions, in determining the overnight policy rate.

In Malaysia, the consumer price index (CPI) for November rose 3.3% year-on-year, attributed to a rise in food & non-alcoholic beverages, transport & housing, and water, electricity, gas & other fuels.

At the world level, economists foresee the global economy resuming its recovery this year on the back of reopening of international borders – if there are no further lockdowns due to the emergence of new variants of the coronavirus.

In this regard, many see Malaysia’s high vaccination rate as a boon that has allowed the government to reopen the economy and kick-start the recovery process.

The better outlook in 2022 is expected to translate into a continued recovery in domestic economic activities as both consumers and businesses will increase their spending.

Furthermore, the government’s spending will contribute positively to growth, evident in the expansionary Budget 2022 which saw a record high allocation for development expenditures. Continued growth in external demand will continue to support Malaysia’s foreign trade activity.

Moving forward, experts see 2022 to be a year of reopening play, particularly in the banking sector and 5G-related technology.

For Malaysia, an improvement in the pandemic situation and more open international borders are expected to translate into an improvement of in the foreign worker situation, which will benefit the plantation and the construction sectors.

Principal Group head of islamic business and Principal Islamic Asset Management CEO Datuk Syed Paduka Mashafuddin stated that its house views remain favourable on reopening plays, laggards, as well as sectors with structural or secular growth stories.

“Despite any near-term market uncertainties, investors should remain invested in financials, consumer discretionary, basic materials, and selective technology sectors such as 5G, fintech, healthtech and greentech, to name a few.

“In addition, we favour sustainable investing supported by carbon neutral pledges, the US rejoining the Paris Agreement, and substantial inflows into ESG funds and ETFs,” he said.

Mashafuddin believes that there are significant opportunities in both emerging and developed markets.

Just days into 2022, the Omicron variant has already started to disrupt global recovery efforts as a new wave of positive cases has shattered daily highs across the US, the UK, France, Australia and other countries. Anxiety over the new strain has also led to the US and the UK imposing restrictions on travel to certain African countries.

In China, a rising number of cases has led the authorities to impose a strict lockdown in Xian, which houses the manufacturing facilities for two of the world’s largest memory chip makers, Samsung Electronics and Micron Technology. The lockdown will exacerbate the pressure on the global supply chain, which already has to contend with higher raw material and freight costs.

In South Korea, the arrival of Omicron resulted in a surge in infections, which prompted the government to impose stricter measures.

With the pandemic yet to be put to rest, experts posit the anticipated recovery in 2022 will be contingent upon the Covid-19 virus’ future mutation and the ensuing response. With the Delta and Omicron onslaught, the global economy has seen a return to some restrictions to curb the spread of the virus. Should 2022 see more such measures, the global recovery path will be bumpy indeed.

In addition to the immediate impact of Covid-19, the global economy has had to contend with the onset of high inflation, which in turn has led to an increasingly hawkish stance by many major central banks following an era of record-low interest rates induced by the pandemic. Surging inflation is particularly felt in food and fuel prices.