THE 17.1% contraction of gross domestic product in the second quarter (Q2 2020) because of Covid-19 was worse than the Asian Financial Crisis in 1998, OCBC Bank said in a note.

It is worse than the 11.2% contraction recorded in the fourth quarter of 1998.

OCBC economist Wellian Wiranto said Q2’s contraction meant that the economy shrunk by 16.5% from the previous quarter (Q1), meeting the definition for a technical recession of two consecutive quarters of negative GDP growth.

Private consumption accounted for 61.7% of Q1 GDP growth.

However, it registered a year-on-year decline of 18.5% in the second quarter, shaving off headline GDP growth by a hefty 10.7% over the period.

“Before the GDP data release (today), we had fairly high hopes that the relative strength of consumption that we saw in Q1 could put it in a better stead to withstand the onslaught of the challenges in Q2.

“We also anticipated better (results) from the rounds of stimulus handouts by the government, as well as the positive net effect of loans moratorium,” he said.

It was thought that these measures by the government would help cushion the blow but the two-month lockdown under the MCO and the rising unemployment rate (to 5.3% in May before dropping to 4.9% in June) have had a “much larger effect”, Wiranto added.

The Q2 contraction might pull down the full year GDP growth to up to -5.1%, he said.

He also expects Bank Negara Malaysia (BNM) to cut the Overnight Policy Rate (OPR) by another 25 basis points, to a new record low of 1.5%. This may happen when the Monetary Policy Committee meeting is held on September 10.

The timing of the cut, however, would help ease consumers back to the sudden transition of servicing debts. The expected OPR cut would come before the expiration of the six-month loan moratorium, which ends at the end of September.

A cut in the OPR rate would help those who would not qualify for the extended moratorium which is targeted at borrowers who have lost jobs and who took pay cuts.

“Easing the interest rate burden via another OPR cut could be one factor of consideration by the MPC, especially when inflation outlook remains tame, with BNM still keeping to the projected range of -1.5% to 0.5% (inflation) for this year,” he said.

Wiranto said the six-month loan moratorium had helped support private consumption in Q2, and without, the economy would have slumped even more considerably.

Meanwhile, MIDF Amanah Investment Bank Bhd research revised its full year forecast to -4.8%, from -2.1% as the economic fallout turned out to be more severe than expected.

“Based on current developments and indicators, the economy is set to improve however on a gradual term as the sentiments are still weak due to uncertainty over Covid-19, with other downside risk emerging such as the political situation, rising protectionism and geopolitical tensions,” it said.

The research house said some countries are witnessing a resurgence of Covid-19 cases, which led to lockdowns being reinstated, or authorities retracting plans to resume economic activities. 

Despite the pandemic being under control in Malaysia, the country’s borders remained shut and the high unemployment rate will impact private consumption which is also the main driver of the economy.

“Nevertheless, stimulus packages and OPR cuts are likely to cushion some of the adverse impacts,” MIDF said. – August 14, 2020.