Insight - Is the economy getting better?

Rollout of vaccination programmes holds key to lift sentiment, aid recovery

THE Malaysian economy is still healing under different phases of movement restrictions to flatten the third wave of virus infections, which have risen to high levels since September 2020.

A welcome relief is the arrival of vaccines in late February, paving the way for the first phase of vaccination programmmes in Feb-April 2021.

The effective and accelerated rollout of vaccination programmes holds the key to lift sentiment and aid the uneven state of economic and business recovery.

While it may be hard to confidently say that the Malaysian economy is getting better, some say that the worst of the Covid-19 pandemic is behind us with the availability of vaccines.

Lee Heng Guie: While it may be hard to confidently say that the Malaysian economy is getting better, some say that the worst of the Covid-19 pandemic is behind us with the availability of vaccines.Lee Heng Guie: While it may be hard to confidently say that the Malaysian economy is getting better, some say that the worst of the Covid-19 pandemic is behind us with the availability of vaccines.

Even though there are data that suggest that the economy is now on a path of mixed improvement, many people and businesses feel discouraged and frustrated.

Since the fourth quarter of 20202, a resurgence of the third wave of virus spread and conditional MCO have had scarring effects on economic and business activities.

The economic output, as measured by the Gross Domestic Product (GDP) continued to decline by 3.4% year-on-year (y-o-y) in the fourth quarter of 2020, moderately higher than 2.7% in the third quarter.

The health pandemic crisis has regressed our national output two years backward.

The full-year real GDP declined by 5.6% to RM1.34 trillion in 2020 from RM1.42 trillion in 2019 (2018:RM1.36 trillion).

Nominal GDP at current market price contracted by a larger magnitude of 6.3% to RM1.41 trillion in 2020 from RM1.51 trillion in 2019, and was lower than nominal GDP value of RM1.45 trillion in 2018.

The services sector, which is the largest contributor of total economy (57.7% of GDP in 2020) are still struggling to heal, especially the travel, tourism and retail sub-sectors.

A resurgence in Covid-19 infections have weighed on consumer spending as demand of food and beverages, accommodation, transport and communication have declined by between 23.1% y-o-y and 61.2% y-o-y in the fourth quarter of 2020. Retail sales also dipped by 3.1% y-o-y in the fourth quarter compared to -2.4% in the third quarter of 2020.

The barely recovered domestic tourism also got hammered hard as the hotels’ average occupancy rates have fallen back to less than 20% during Jan to mid-Feb 2021.

Even if the inter-state travel ban is lifted down the road, there is so much that domestic tourism can fill the gap that is left by inbound international tourists.

As the international travel ground to a trickle, their absence continues to bruise entertainment and recreation, retail, hotels and restaurants as well as aviation sector.

The exploring of “Travel Bubbles” and “Green Lane” with China, South Korea, Japan and within Asean must be given priority once it is being assessed that the reciprocal countries have the same level of low risk.

Amid embarking on the vaccination programme, we expect the scarring effects from less restrictive MCO 2.0 and conditional MCO to continue in the first half of this year, especially retail, hotels and restaurants as well as transport and communication.

The less upbeat spending mood in the run up to the Chinese New Year celebration in the month of February is a dampener on consumption.

We expect the disproportionate impact of the Covid-19 pandemic between the manufacturing (the recovery is mainly supported by the export-oriented industries), construction (could be delay and dampen by many virus clusters in construction sites) and services sectors (a delayed recovery in travel and tourism-related sub-sectors).

In other words, some are doing very well in the current Covid-19 environment, while others are still struggling to recover from the initial devastating impact of the pandemic.

Between March and September 2020, a total of 32,469 small and medium enterprises (SMEs) have folded.

Private investment declined by 11.9% y-o-y for the first time in 2020 since the 2008-09 global financial crisis, and is expected to revive moderately as businesses and investors are in waiting mode, owing to cautious uncertainty on the future of the pandemic and the economic outlook.

Thus, public investment via the budget expenditure has to be accelerated to generate amplifying effects on domestic demand and private investment.

Consumer spending (59.5% of GDP) is one of the most closely watched data points within the GDP.

Amid cautious sentiment and weak employment prospect as well as reduced income, household spending was down by 3.4% y-o-y in the fourth quarter of 2020, higher than -2.1% in the second quarter. In 2020, private consumption declined by 4.3%.

It is reckoned that consumers and businesses have increasingly turned to the digitalisation and e-commerce platform as well as make online transactions estimated about 25% of total online transactions, while physical stores’ sales and customers dined-in restaurants still make a large proportion of total sales.

On worrying about the virus spread, people’s conscientiousness about going out to prevent the spread of the virus, they were less likely to spend as much as they otherwise would have.

The “revenge” spending and pent-up demand will eventually be reviving up if confidence returns on the back of accelerated vaccination, backed by a robust job growth.

The labour market is not out of the woods yet, with retrenchments and unemployment rates continuing to rise.

After easing off to 4.6% in September from a record high of 5.3% in May, unemployment rate has ticked up to 4.8% in December 2020 (4.8% in Nov), equivalent to around 772,900 unemployed persons compared to around 520,000 persons before the pandemic.

The Employment Insurance System continued to register high number of employees, 8,334, have lost employment in January and 4,478 employees as at Feb 18 2021.

In 2020, a total of 107,024 persons lost employment in 2020,267.0% higher than 40,084 in 2019.

We estimate jobless rate to reach 4.5% at end-Dec 2021 versus 4.8% at end-Dec in 2020 due to: (i) A long drag of recovery in the travel-related sectors; (ii) Remote working arrangement reduces demand for transportation services; (iii) The tapering effect of government’s intervention; and (iv) The Covid-19 could exacerbate skills mismatch, due to the adoption of manpower-saving processes and technologies.

Exports offer a bright economic spot, thanks to the sustained demand of electronics and electrical products, firmer palm oil prices and crude petroleum, rubber products, chemical and chemical products as well as optical equipment etc.

Exports of goods and services (61.6% of total GDP) are expected to cushion the overall economy while waiting for a full steam recovery in domestic demand.

Lee Heng Guie is the Socio-Economic Research Centre (SERC) executive director. The views expressed here are the writer’s own.

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