MALAYSIA’S gross domestic product (GDP) is set to register a sharp double-digit contraction as a result of the Covid-19 pandemic, economists said ahead of Bank Negara Malaysia’s announcement.

The central bank will announce the second quarter 2020 GDP data tomorrow.

Economists told The Malaysian Insight that they are expecting a year-on-year (y-o-y) contraction of between 10% and 17% for the second quarter due the shutdown in economic activities during the movement-control order imposed to contain Covid-19.

The sharp contraction is also expected to be in line with the decline in the indices for manufacturing, mining and services, professor of economics at Sunway Business School Dr Yeah Kim Leng said while citing data from the Department of Statistics.

The manufacturing, mining and services sectors registered declines of 8.5%, 10.7% and 21.5% respectively, while the value of construction works fell by 44.9% in the second quarter, he said.

“The GDP contraction will likely be much worse than expected. Based on the indices of the key sectors, the GDP contraction for the second quarter is estimated at 17%,” he told The Malaysian Insight.

Yeah said similar to other countries facing the pandemic, the key factor for the plunge in GDP is the shutdown of social and economic activities to contain the virus’ transmission.

“The good news is that the worst is behind us as most recent indicators point to significant month-to-month improvements in May and June.”

The stabilisation of the monthly indicators in May and June is an indication that unemployment is declining and there’s steady improvement across production, consumption and trade, he said.

“However, for those who have lost their jobs and for SMEs struggling with low business volume during the second quarter, (they) can now look forward to better economic conditions in the second half on the critical assumption that there is no resurgence of the Covid-19 outbreak,” he said.

Meanwhile, senior research fellow at the Malaysian Institute of Economic Research (MIER) Dr Shankaran Nambiar expects the GDP to contract by 10% in the second quarter of this year.

However, he said it’s important to keep an eye on insolvency and non-performing loans (NPL) in the third quarter (Q32020).

“Should too many companies turn insolvent, the burden of layoffs and unemployment would affect the man on the street. Fresh graduates would also be faced with bleak job market prospects,” Nambiar said.

Malaysia could probably see one of its worst quarterly contractions since the 2009 global financial crisis where the GDP growth contracted by -6.2% in the first quarter followed by -3.9% and -1.2% in the subsequent two quarters.

Asked on how this could be any different, Nambiar said the current economic contraction is spurred by an epidemiological crisis which has spanned across borders.

The depth of the economic crisis, he said, cannot be ascertained until the pandemic is fully contained.

“As a small, open economy we are susceptible to disruptions in global supply chains, unstable financial markets, and the collapse in global demand.  The pandemic has spread its tentacles across borders and sectors; it is not a question of just fixing financial markets or reviving domestic demand,” he said.

Meanwhile, MIDF Amanah Investment Bank Research said in a note on Monday that the decline in private consumption, which is a main growth driver, is expected to dampen GDP growth for the second quarter.

The research house said distributive sales saw the lowest performance so far as economic activities, recording a y-o-y contraction of -22.6% in Q2 as economic activities were largely shut during the period due to Covid-19.

Growth is further impacted by the closure of international borders.

“This point towards significant contraction in GDP for 2Q20 as private consumption is the biggest contributor to Malaysian economy,” it said. – August 13, 2020.