World Bank: Economic Outlook for 2021

 

In a recent report, The World Bank has projected global economy to expand by 5.6 percent in 2021, its strongest post-recession growth rate in 80 years. This recovery, however, is uneven and largely reflects sharp rebounds in some major economies, most notably the United States (U.S.), owing to its large fiscal support. Nevertheless, global GDP is expected to remain 1.9 percent below pre-pandemic projections.

The ongoing pandemic and movement restrictions will affect Malaysia’s economy in the near term. According to the World Bank, Malaysia’s economy is projected to grow by 4.5 percent in 2021. This latest projection is 1.5 percentage points lower than the earlier forecast of 6.0 percent. The revision reflects the slower pathway towards suppression of the pandemic and the slower-than-expected vaccine rollout. The trajectory and pace of growth will depend on the duration and severity of movement restrictions, the containment of the pandemic, and the pace of the vaccine rollout.

The worsening COVID-19 situation and the re-imposition of the MCO is expected to have considerable impact on private consumption. The movement restrictions coupled with increased precautionary behaviour and subdued wage growth is expected to affect household spending activity (2021f: 4.2 percent; 2020: -4.3 percent). This is especially so for services-related sectors. Meanwhile, public consumption is expected to continue to expand over the near term, albeit at a slower rate.

With recovering global demand, export growth is likely to gain momentum. Given the acceleration of advanced nations’ vaccination programs and the reopening of their economies, global demand is expected to continue to recover in the near term. The growth rate for Malaysia’s exports of goods and services is projected to rebound to 13.1 percent in 2021 (2020: -8.9 percent) as global demand picks up. Import growth is projected to rise by 13.6 percent (2020: -8.4 percent), with the growth of intermediate and capital imports regaining some momentum due to improvements in exports and investment.

It is projected that investment activities will be driven by continued improvement in export-related activities. Gross fixed capital formation is projected to rebound to 6.2 percent (2020: -14.5 percent), supported by increased capital expenditure in the private sector. Increased production in the manufacturing and trade related sectors, particularly in the E&E as well as oil and gas subsectors, will support this growth.

Headline inflation is projected to be higher in 2021. The average consumer price inflation rate is projected to increase to 3.0 percent, (2020: -1.2 percent), mainly due to the gradual improvement to domestic demand and higher fuel prices.

However, the economy faces several downside risks. An ineffective containment of the outbreak could see Malaysia remain in an ongoing cycle of movement controls, posing a further drag on the economy. Further delays in Malaysia’s vaccine rollout could also affect the planned reopening of the economy. The current slow pace of Malaysia’s vaccine rollout and any further delays could also affect a more certain reopening of the economy. In addition, the number of vulnerable households could remain elevated and the ongoing domestic political uncertainty could continue to hinder the progress of the recovery effort in the near term.

In 2020, private investment fell by almost 12 percent with FDI contracting by 55 percent. Malaysian firms, especially SMEs lag global peers on productivity measures. Productivity growth and private-sector innovation will be the primary drivers of future growth. Deep structural reforms will be needed to remove distortions, encourage innovation, strengthen competition in markets, improve the investment climate, and facilitate deeper regional integration.

Having said all that, it would have been better for the World Bank to have given a range on its forecast growth, say 3-4.5% rather than a fixed number. In addition, it should have detailed what reforms are required in the immediate. It may be obvious but coming from a major institution carries higher weight. Malaysia is behind its neighbours like Singapore and Vietnam not because of resources or planning but more of its own doing of legacy policies and their continued failure in implementation. Can we do better?

 

Reference:

Malaysian Economic Monitor, World Bank Group, June 2021