Output gap inevitable as economy recovers from pandemic fallout

Published on 27 Aug 2021.

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In its Economic Update 2021 report released today, RAM Ratings expects the ramped-up vaccination rate to facilitate the reopening of most sectors in 4Q, providing a healthy lift to growth. Our full-year GDP forecast for 2021 stands at 3.8% (revised in July 2021). 

For 2022, we have pencilled in a growth forecast of between 7.0% and 8.0%. Although this is primarily aided by low base effects, the reopening of most sectors of the economy and gradual utilisation of domestic spare capacity should boost underlying growth. Continued recovery in global demand, particularly excess demand for semiconductors, will also buoy Malaysia’s performance next year. Overall output for 2022 is expected to recover to above the level seen in 2019, estimated to be about 4.8%-5.8% higher.

Economic conditions are however unlikely to fully normalise until after 2022. The severity of the impact on the economy has resulted in negative output gap in the short term. We estimate that the economy, in aggregate, would operate 5.0% below its potential output in 2022. This translates into about RM75 bil-RM85 bil less in output than could have been achieved without the fallout from the pandemic. 

The corresponding average unemployment rate is projected to remain elevated at circa 4.0% (above the 5-year average of 3.3%), with some 100,000-120,000 more unemployed workers than would ordinarily be seen. Net job creation of 40,000 to 50,000 jobs per month would be required for the labour market to fully recover in the next 18 months – a tall order if business sentiments stay weak. We do not expect a strong wage rebound as productivity growth will remain tepid, given the forced transition of labour across sectors and a prolonged furlough. 

To bridge this output gap, additional direct fiscal measures amounting to up to RM40 bil would be appropriate. The country’s current fiscal position however constrains the government’s ability to meet this requirement. Sizeable stimuli to combat COVID-19 have pushed Malaysia’s fiscal deficit in 2021 to 6.9% of GDP, by our estimate. Funding for this is projected to propel government debt to 64.9% of GDP by end-2021 (our estimate), although higher oil prices this year should offset some of the fiscal pressure.   

The pace of vaccinations remains a key driver of domestic recovery, as is the continued recovery of the global economy. Exports are still the bright spot in the Malaysian economy, for which we project a strong rebound (2021: 11.1%; 2022: 4.6%) amid the semiconductor supercycle. 

To access the report, click here

Analytical contacts
Jason Fong
(603) 3385 2616

Woon Khai Jhek, CFA
(603) 3385 2512

Media contact
Sakinah Ariffin
(603) 3385 2505



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Publication Date Published Category
Economic Update 2021 27-Aug-2021 Economic Outlooks View PDF