GDP Growth: Mother of Miracles?

Economists are cautious about the outlook of the economy in the second half of 2022. Challenges such as the Russia-Ukraine war, higher inflation, supply chain disruptions and the very weak ringgit are factors affecting their thinking.

Malaysia’s gross domestic product (GDP) growth rate for 2022 is likely to be 3.5% in a baseline scenario. The slowdown of China during the second quarter of the year already had a significant impact on exports. Others suggest an upside scenario where GDP is expected to grow 5% this year, as forecast by the government and Bank Negara. This is based on the assumption that everything will go smoothly and converge to a pre-pandemic scenario. No one accounts for lack of labour (1.2 million) in manufacturing, plantation and construction sectors. They look to the mother of miracles – growth without labour!

Source: https://clicknepal.com

In a baseline scenario, there could be “some persisting international factors” that would result in a downward revision of growth in many parts of the world. And, in a downside scenario, there could be some “black swan” event affecting the international economy. The negative events can be many – geopolitical, with an extension of the war, financial, with a stock market or a dollar crash, political turmoil especially in the United States before the mid-term elections or economic, with a full-blown recession in some European countries.

In the baseline scenario, GDP is forecast to grow 3-3.5% and 4-4.5% in 2022 and 2023, respectively. In the poor scenario, the Malaysian economy is sliding into a technical recession (in the second and third quarters) and growth close to nil for the whole year. 

Malaysia’s economy grew by 5% in the first quarter of 2022, supported by increases in both domestic and external demand as well as labour market recovery. During the quarter, monthly GDP grew by 4.3% in January, 5.2% in February and 5.4% in March.

The labour market showed the unemployment rate at 4.1%, a 0.2-percentage-point improvement compared with the previous quarter, attributed to the implementation of a wage subsidy programmes worth more than RM20bil and successful job creation initiatives such as JanaKerja and JaminKerja.

The central bank expects GDP growth for 2022 at between 5.3% and 6.3% (2021: 3.1%). Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the country’s economy is expected to continue to strengthen in the second quarter of this year, following the encouraging GDP growth of 5% in the first quarter, including the continued improvement in wholesale and retail trade. He pointed out that the economy was gradually improving and had started to expand based on various indicators for May 2022.

To accelerate the recovery momentum, Tengku Zafrul said the Finance Ministry had kick-started engagement sessions in an effort to establish measures that took into account the needs of various stakeholders. Budget 2023 will emphasise structural reforms and boosting economic resilience. With its theme of ‘Strengthening Recovery, Facilitating Reforms Towards Sustainability of Economic Resilience and Well-Being of Keluarga Malaysia’, the government will continue to focus on the well-being of the people, businesses and economy.

Economic growth in the first quarter was primarily driven by private consumption and government spending. Investments have remained stagnant and this is the concerning part of the growth recorded so far.

Here lies the key to better outcomes. Improve investment environment including labour shortages, support domestic consumption, enhance government spending and drive exports then you will have your GDP forecast of 5% or more. But what specific steps are required? Not silly arguments on language but solid ones on what SMEs require for re-investment and digitalisation. Assist banks to direct lending, encourage lower income group to spend with cash transfers and work with exporters/traders on markets and logistics. If MITI, MIDA, Home Ministry, Human Resources and MoF can get their act together, we have a base for a good GDP growth. If not, we will plod along and blame everyone (esp. the Indonesians) but ourselves.

Reference:

External factors to play big role in GDP growth, Eugene Mahalingam, The Star, 11 July 2022