BETTER than what most economists expected, the Malaysian economy grew marginally at 0.7% year-on-year in the first quarter of 2020 (1Q20). However, this was a sharp deceleration from the 3.6% expansion in 4Q19 and the slowest pace registered since the global financial crisis (GFC).

On a quarter-on-quarter basis, the economy declined by 2% compared with a growth of 0.6% in the preceding quarter.

As comparison within the Asean region, other economies appeared to be in the slowing trend too. Singapore’s advance gross domestic product (GDP) dropped 2.2% while Indonesia’s slowed to the weakest pace since 2001 at 3%.

The outcome for Malaysia is certainly not surprising as the pandemic and the movement-control order (MCO) beginning March 18, now known as the conditional MCO (CMCO), have taken a toll on the economy, as noted by Bank Negara Malaysia (BNM) in its press statement.

Looking at the industry level, the sectors either recorded subdued expansion or contracted relatively to the previous quarter:

1. Services – From 6.2% to 3.1%;
2. Manufacturing – From 3.0% to 1.5%;
3. Mining and quarrying – From -3.4% to -2.0%;
4. Construction – From 1.0% to -7.9%; and
5. Agriculture – From -5.7% to -8.7%.

For expenditure components, the breakdown of GDP are as follows:

1. Private consumption – From 8.1% to 6.7%;
2. Government consumption – From 1.3% to 5.0%;
3. Gross capital fixed formation – From -0.7% to -4.6%;
4. Exports – From -3.4% to -7.1%; and
5. Imports – From -2.4% to -2.5%.

The restriction on most economic activities since the beginning of MCO has resulted in an economic loss worth RM2.4 billion per day, according to Prime Minister Muhyiddin Yassin.

To prevent further damage to the economy, particularly businesses, the government has decided to lift restrictions on most economic sectors beginning May 4 alongside the establishment of standard operating procedures (SOPs).

The prime minister said, should the stricter MCO be extended, the total loss would be close to RM100 billion.

Nonetheless, our economy is not out of the woods yet, so long as the Covid-19 vaccine is absent and the CMCO is in force until June 9. Despite the ongoing distribution of RM260 billion in stimulus packages to the businesses and rakyat, many still feel the pain.

In 1Q20, the unemployment rate rose to 3.5% (3.2% in 4Q19), with a larger number of unemployed at 546,600. Those who are vulnerable in the job market were the ones in the age group of 15-30 years (6.9%).

Headline inflation also fell sharply to 0.2% year-on-year in March (1.3% in February), mainly due to decreased transportation costs helped by low crude oil prices and less spending on clothing and footwear. For the whole first quarter, inflation was muted at 0.9%.

Low inflation also complemented the slump in consumer sentiment index released by the Malaysian Institute of Economic Research (MIER) – from 82.3 in 4Q19 to 51.1 in 1Q20.

This is only the first quarter. Subsequently, the second quarter is also projected to be gloomy given the extended containment measures.

Judging from the early indicator that is available for 2Q20, disruption in supply chains have badly impacted manufacturing activities with IHS Markit Purchasing Managers’ Index (PMI) slipping to 31.3 in April from 48.4 in March.

According to most manufacturing firms, the poorer performance at the start of the second quarter is due to domestic implementation of movement restrictions, as well as in the export markets to mitigate the virus’ spread. Some also said that reduced output was affected by the lack of manpower and low intakes of new work.

Earlier this month, BNM slashed the benchmark interest rate by another 50 basis points from 2.5% to 2%, matching GFC-lows. Cumulatively, the central bank has proceeded with a 100 basis point cut this year. Due to the severity of the pandemic and the uncertainty on economic outlook, more rate cuts are possible.

Although efforts to revive the economy have started to show, the recovery process would vary across sectors which are domestic-oriented or external-oriented.

Malaysia being an open economy that relies on trade to support the economy, domestic recovery does not guarantee the wellbeing of external economies. This is on the back of pessimistic global conditions – weak external demand, low oil prices and disruptions in businesses caused by lockdowns.

Unemployment is already expected to surpass the government’s initial target of 4% given the business closures during the MCO.

Society’s behaviour towards the current environment could also be the determinant of recovery speed. This includes how we practise the new norms in terms of social distancing to prevent new waves of infections and how spending have changed throughout this trying time. These too would affect the economy going forward.

As noted by officials, the economy will only begin experiencing recovery beginning in the second half of 2020 onwards but the materialisation will be dependent on the adequacy of the government’s next agenda – economic recovery plan. – May 15, 2020.

* Nur Sofea Hasmira Azahar is research analyst at EMIR Research.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.