2020 was an intense and volatile year as the unprecedented COVID-19 pandemic ravaged across the global economy, leaving a trail of massive socio-economic destruction and business damage. The ensuing Great Lockdown worldwide and devastating impact of pandemic catalysed the most severe global economic contraction since the Great Depression.
The starting of a mass vaccine distribution and immunisation process in some advanced economies injects a greater sense of optimism that the global economy will bounce back in 2021.
But, the global economy is not yet completely out of the woods. We see four key risks that might derail the global recovery:
(a) The multiple waves of the new virus strains mutation, which are difficult to control, which may require renewed national lockdowns in many countries;
(b) Inadequate policy support due to the limitation of monetary policy and fiscal space or the fading effect of fiscal stimulus;
(c) While investors expect a more predictable US policy trajectory under the Biden administration on trade, it is too early to assess the Biden administration’s stance on the US-China relationship, a technology war between the United States and China remains a risk; and
(d) Geopolitical flashpoints.
In Malaysia, the Movement Control Order (MCO) and pandemic have sent the already slowing economic growth trajectory into a heavy tail-spin, suffering a historic sharp economic output decline of 17.1% in 2Q 2020 before narrowing to a smaller contraction of 2.7% in 3Q. However, the emergence of a third wave in late September, which resulted in high three-digit and four-digit new infection cases daily have tempered consumer and business sentiment. With a slower improvement in 4Q 2020, we estimate the full-year 2020 GDP to decline by between -5.5% and -5.8%. The unemployment rate has re-ticked higher to 4.7% (748,200 unemployed persons) in October after stabilising at 4.6% for two months.
The economy has yet to be fully restored to full capacity as the pandemic has disproportionately impacted the services industry versus the manufacturing industry due to physical distancing measures and changes in consumer behaviour. The travel, tourism and aviation industry as well as retail sector are slowly on the mend until the vaccine is distributed and at least 50% of population get vaccinated as well as international travel resumes.
As the difficult 2020 year ended on a hopeful note with the welcome news of COVID-19 vaccine distribution and people being inoculated in the advanced economies, it is believed that the Malaysian economy will continue to heal through 2021 and beyond. The government indicated that the first batch of vaccines will arrive in February-March 2021 as the process of securing a portfolio of vaccines continues throughout the year. The government has secured supply for 40% of the population (12.8 million people) in 2021 through joint agreements with COVAX, Pfizer and AstraZeneca.
What’s needed is a national plan to build people’s confidence in COVID-19 vaccines, tailoring to different segments of the Malaysian public, each with different reasons for skepticism, different levels of trust in different people and institutions, and different attitudes and behaviours towards how they protect themselves. According to the World Health Organisation (WHO), 60% to 70% of the population has to be vaccinated to reach the protection that comes from community-wide immunity.
We recognise that the shape of Malaysia’s economic growth in 2021 is dependent on the development of vaccine inoculation and infection rates, the effective implementation of Budget 2021 spending programmes, including cash assistance, consumer and business confidence as well as the economic performance of Malaysia’s major trading partners.
Our base case scenario projects real GDP growth of 5.0% for 2021 assuming that the global economy continues to recover, albeit unevenly and at a slower pace. We remain wary of the Budget 2021 implementation capacity risk as well as the lingering policy and political risks. For an upside scenario, 6.5% for 2021 on an assumption of accelerated vaccination, supported by a more robust rebound in services with the resumption of international travel. It is also assumed that the effective implementation of the largest ever fiscal stimulus (total expenditure of RM322.5 billion) or -5.4% of GDP budget deficit enhances a faster domestic demand-driven recovery.
The year 2021 will witness the rollout of key development plans, starting with the 12th Malaysia Plan (2021-2025), followed by the New Industrial Master Plan (NIMP). The 12th MP would chart the broad direction and strategies of the country’s socio-economic development based on the Shared Prosperity Vision 2030 while the NIMP will accelerate the industrial transformation as Malaysia continues its quest to become a high-income nation by 2030.
What will fundamentally transform the Malaysian economy? The government needs to undertake BOLD AND DECISIVE fiscal and economic reforms to strengthen our economic resilience and business prospects for the future. We need to chart a roadmap for restoring public trust in government by making immediate and tangible improvements to the institutional and political system.
The focus points over the next five years are as follows:
1.Address structural weaknesses and vulnerabilities: Malaysia still remain trapped in the middle-income trajectory; limited fiscal space; low investment in ICT; slowing productivity growth; enhance greater exports capacity, especially for SMEs; and the shortage of skilled manpower and brain drain.
2.Reviving economy and ensuring sustainability (Environmental, Social, and Corporate Governance (ESG)), digitalisation, education and skilled human capital development to prepare our workers to have skill sets to excel in the jobs of the future will be central.
3.A major overhaul of redistributive policies and design an inclusive social protection system safety to reduce income inequality and regional economic development gaps.
4.Redefining the role of government, government-linked companies (GLCs) and government-linked investment companies (GLICs). Reforming public sector delivery services to become an effective facilitator. GLCs should focus on building strong institutions, spearheading new growth areas to open up for private sector as well as developing areas based on policy needs.
5.Competitiveness, innovation and environmental sustainability in ensuring our businesses and industries are able to compete in an increasingly complexity global marketplace.
Lee Heng Guie is Executive Director of the Socio-Economic Research Centre (SERC).