THE annual economic growth last year came out as we expected, at around 3.1%, which is toward the lower end of the 3%-4% forecast range of Bank Negara Malaysia.

The outcome for the full year confirms that there has been and, we believe still is, too much optimism about the growth prospects for the coming year (this year).

Our analysis suggests that the low growth numbers last year are due to the structural impact of the lockdowns which created a more complicated situation for businesses and consumers and slowed the transition to normal growth.

On a positive note the economy recovered well in the fourth quarter compared with the previous quarter.

Gross domestic product (GDP) grew by 10.4% on a quarterly basis and 6.6% in seasonally adjusted terms. This is second only to the 21.3% quarterly growth seen in the third quarter of 2020, which was the biggest rebound in recent years.

Nonetheless, the bumpy pattern tells us that the economy is being pushed by the many government stimulus and other policy measures such as Employees Provident Fund withdrawals rather than expanding due to strong underlying growth and improvement in fundamentals.

This is concerning after two years of crisis, and shows that we still do not see the quality of growth that will allow us to be optimistic just yet.

If we look at the two main pillars of economic growth in more detail, we can see some of the causes of our cautious approach. Private consumption grew by about 5% on a quarterly basis and fixed investment grew by 5.5% on a quarterly basis. Looking at this composition, we can see that there is a worrisome reliance on low-quality, short-term factors.

As the economy reopens at the end of the year, we will expect consumption in the fourth quarter to pick up significantly. As people start to go out again after the lockdowns, many forecasters expected them to spend more of the pent-up consumption that had been held back during the movement control orders.

We feel that we may not see this pent up consumption, and although it did happen to some extent, what we actually saw was a sort of zero-sum expenditure effect so that the overall consumption impact was muted for three reasons.

First, as people started to move around more freely, the use of cars and other transportation increased, causing consumption to climb due to extra transportation spending worth about RM10.8 billion. This increase in spending contributed more than the total increase in consumption, RM 10.3 billion. So, net of the “transport effect” consumption would have been flat.

Second, as people started to go out more, they made savings on eating and drinking at home worth about RM4.4 billion, but spent RM4.7 billion in restaurants, hotels, recreation and services. So, we can see that this overall near-zero sum suggests a shift in consumption rather than a net increase.

Third, we can see that the savings made by many from the utility bills discount worth about RM1.7 billion have, in some sense, been used as a buffer to spend more money on discretionary items such as clothing and footwear, furnishings, household appliances and communications, which together increased by about RM1 billion. Again, this is more of redistribution than a net increase in consumption.

Overall investment rose 5.5% in Q4 compared with Q3, which is important and good news. However, the breakdown shows that the aggregate increase comes from an 81% rise or an extra RM10.4 billion increase in public investment from the previous quarter, but a sharp 13% contraction over the same period or RM6.8 billion in private investment.

During the lockdowns, private investment fell 33% compared with the final quarter of 2019, and has yet to recover.

As we have argued before, we have to consider investment and, in particular, the private investment as the engine of the economy. If there is not enough aggregate demand and profit generated from that demand, then private investment will continue to fall. This is not compatible with a robust and solid growth phase ahead.

However, there are some good signs from external demand and trade balance, which, again, contributed to overall growth.

Exports rose by 12% on a quarterly basis, consolidating the recovery over the last few quarters and bringing the current account ratio to its highest level in the pandemic crisis period reaching 8.6% of GDP. This export-led part of the recovery in turn will help the recovery in employment and wages.

So, while we see some positive signs pointing toward slow but steady recovery, we still need a new engine to sustain this momentum from new sources of private investment and an increase in disposable income to allow consumers to spend more in net terms than simply switching spending one place to another.

Malaysia must build the new phase of growth on solid domestic investment and robust consumption rather than rely on external demand and government spending. This will be the challenge for 2022. – February 11, 2022.

* Paolo Casadio is an economist at HELP University. Professor Geoffrey Williams is an economist at Malaysia University of Science and Technology.

* 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.