RAM revises Malaysia’s GDP forecast for 2021; recovery still at risk from further containment measures

Published on 29 Jan 2021.

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RAM expects the present movement control order (colloquially known as MCO 2.0) until 4 February 2021 to lower Malaysia’s GDP growth by 1.3 percentage points (ppt). Consequently, we have revised 2021’s GDP growth from our initial forecast of 7.1% to 5.8%. Every subsequent day of extension after that is estimated to trim 0.04 ppt off growth this year.

While the restrictions under MCO 2.0 are tighter than the conditional and recovery MCOs of the preceding two months, the overall impact is still less severe than MCO 1.0. We estimate daily economic losses during MCO 2.0 to average about RM500 mil-RM600 mil - much lower than the RM2.4 bil estimated by the Government under MCO 1.0. That said, it is much higher than the RM200 mil-RM300 mil projected by Bank Negara Malaysia (BNM) amid the conditional MCO (CMCO) in October-November 2020. Under MCO 2.0, more essential sectors are allowed to operate (including most activities along the supply chain), thereby curtailing some supply chain disruptions faced under MCO 1.0. Industries can also operate at a capacity deemed optimal as long as they adhere to strict SOPs. This contrasts against the mandatory 50% cut in workforce capacity at the onset of MCO 1.0. 

Another indicator of the economic impact of MCO 2.0 is manifested through initial observations on population mobility. Data suggests that the drop in spending activity in the first week of MCO 2.0 was less severe than during MCO 1.0. As proxied by Google’s mobility indicator, travel to points of sale such as grocery and retail stores fell a respective 20% and 52% in the first week of MCO 2.0. The average decline in footfall during MCO 1.0 was larger at a respective 45% and 75%. That said, the numbers for MCO 2.0 are still much higher than the 8% and 30% dips during the CMCO in November 2020.

The services sector is seen to be the hardest hit by MCO 2.0, as evident by its past sensitivity to changes in restriction conditions. The observed retail capacity utilisation plunged to a low of 43% in April 2020, relative to 68% for essential manufacturing sectors. Recovery for the services sector also appears slower after the lifting of restrictions. As of November 2020, the capacity utilisation of the retail sector (67%) had yet to claw back to the pre-pandemic normal (of circa 75%) - in sharp contrast to the rebound of the essential manufacturing sector last June. MCO 2.0 will further aggravate the unevenness in cross-sector recovery this year.

Figure 1: Less severe drop during MCO 2.0                              Figure 2: Relatively weak recovery for retail sector

Sources: RAM, Google Inc and Department of Statistics Malaysia (DoSM)
Note-LHS chart: Chart shows weekly average aggregated series

The labour market is another notable casualty of MCO 2.0. The CMCO in November 2020 nudged the unemployment rate up to 4.8% from 4.6% two months earlier, its lowest level since the start of the pandemic. Moreover, the number of employed persons shrank m-o-m in November - the first time since May 2020. Given the stricter SOPs under MCO 2.0, we expect employers to further reduce their headcount, which may in turn affect private consumption. As such, we are revising our projected unemployment rate to 4.0% for 2021, from the earlier 3.3%.

As highlighted in RAM’s Economic Outlook 2021, an uneven and fragile recovery will remain a feature this year as countries struggle to contain the COVID-19 pandemic. Until vaccines can be swiftly and extensively administered - a scenario we have yet to incorporate into our forecasts given the lack of clarity on timing - Malaysia will still be at risk from transitory setbacks that may warrant further downward revisions to our 2021 GDP growth projections.

Summary of RAM’s key projections

Sources: RAM, DoSM, Ministry of Finance and BNM
Note: 2020e and 2021f are RAM’s projections.


Analytical contact
Woon Khai Jhek, CFA
(603) 3385 2512

Media contact
Padthma Subbiah
(603) 3385 2577


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