The Impact of COVID-19 on Malaysian Economic Performance
Siti Sarah Baharuddin1*
1 Faculty of Economics and Management, Universiti Kebangsaan Malaysia
*Corresponding Author: [email protected]
Accepted: 15 September 2021 | Published: 1 October 2021
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Abstract: Containment measures to control the spread of the COVID-19 pandemic negatively related to economic performance. The paper examines the impact of COVID-19 on Malaysia GDP and key macroeconomic variables using quarterly data from quarter 1 2020 to quarter 2 2021. The results show that COVID-19 has a significant and detrimental impact on the Malaysian economy. Recommended policy measures are focused on accelerating the vaccination program to effectively contain the pandemic and drive economic recovery, as well as comprehensive and targeted fiscal policies to support COVID-19 recovery efforts.
Keywords: COVID-19, Economy, GDP
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1. Introduction
The spread of disease outbreaks is a serious global problem as it can lead to insecurity and huge negative impacts not only on health but also on social, political and economic turmoil, as we learn from one of the most virulent and deadly pandemic , the Spanish Flu, leading the deaths of up to 50-100 million people, caused a negative shock to labor supply and led to an economic crisis. Many studies on the problem of past disease outbreaks have focused on the medical research perspective and the direct impact on the health sector compared to the economic and other sector impacts of the outbreak. Studies of the impact of disease outbreaks on the health sector have been more extensive compared to studies of the impact of pandemics on the national economy, because the traditional scope of assessing the economic impact of human disease events has often been confined to basic direct costs, i.e. medical costs and limited indirect losses such as lost wages (Kristine et al., 2019). However, the unprecedented pandemic COVID-19 with global and prolonged contagion requires in-depth study by experts and academics as well as multilateral collaboration to address the impact of the crisis on all affected sectors.
COVID-19, a catastrophic infectious disease that originated in Wuhan, China, has been plaguing the world for over a year. The epidemic has quickly spread almost worldwide, causing serious global public health problems. On 11 March 2020, WHO declared the COVID-19 outbreak a pandemic, calling on every country to take containment measures while accelerating efforts to control the spread of the disease. The United States, India, and Brazil are now the drivers and centers of the epidemic with the highest recorded cumulative COVID-19 positive cases. Studies by Coronavirus Resource Center, John Hopkins University & Medicine stated that the current COVID-19 case fatality rate by country ranged from 0.1 percent to the highest 19.7percent in Yemen, while Malaysia had a mortality rate of 0.4percent . And a study by Eskild et al. (2020) found that the COVID-19 outbreak had higher morbidity and mortality rates in the elderly than the influenza outbreak.
The first COVID-19 case in Malaysia was discovered on 23 January 2020, and by August 2021, Malaysia has recorded or more than 1.24 million cumulative cases. In line with the recommendation of WHO, the very rapid spread of COVID -19 has led to countries taking closure and lockdown measures to contain the spread of this epidemic. Malaysia government began enforcing the Movement Control Order (MCO) on 18 March 2020. MCO measures are shown to reduce the number of contacts per case per day compared to the period before MCO introduction and to control the resulting COVID-19 epidemic more effectively. MCOs that emphasize adherence to social containment in public places are considered effective in reducing viral transmission and thus eliminating transmission, and this measure helps level the epidemiological curve of infection and the duration of the epidemic. A study by Balvinder et al. (2020) showed that the MCO measure reduced the peak number of active COVID-19 cases by 99.1percent compared to the pre-MCO model simulation, which did not include any MCO measures.
Although the implementation of the MCO is crucial to ensure public health free from contagion, it has had a devastating impact on the economic sector of the country. The impact of the pandemic was not just foreseeable for days after the crisis, but for a long period of time.
Domestic and international economic activities were hampered, decreased consumer spending and lower production affected business, the movement of goods and services and the flow of funds, causing the economy to deteriorate further. The increasing retrenchment and rising unemployment rate for 2020 was 4.8percent compared to 2019 which was 3.2percent especially in the tourism related sector, affecting household income, and indicating a worsening economic situation. The economic growth forecast is uncertain due to the first major pandemic that has paralyzed almost all domestic and global economic activities. To alleviate the effects of the economic crisis and promote the country's economic recovery, national policy must adopt targeted fiscal and monetary measures to assist the families and businesses affected.
Therefore, the Malaysian government has spent billions Malaysian Ringgit through implementation of monetary and fiscal policies accommodation namely moratorium, Overnight Policy Rate(OPR), PRIHATIN, PRIHATIN SMEs, PENJANA, KITA PRIHATIN, PERMAI, PEMERKASA and PEMULIH stimulus packages. Since the COVID-19 pandemic hit the country, the government has implemented seven assistance programs and stimulus packages with a total value of RM380 billion. The Organization for Economic Co-operation and Development (OECD) projects that the economy will lose 2 percent of Gross Domestic Product (GDP) growth for each month the MCO is implemented. The July 2021 World Economic Outlook(WEO) report says the global economy is expected to contract by -3.3 percent for 2020, grow by 6 percent in 2021, and moderating to 4.9 percent in 2022.
Malaysia’s real GDP decreased by -5.6 percent in 2020, down from 4.3 percent for 2019 and 4.7 percent for 2018. The rebound in global and local economic activity is expected to boost Malaysia's real GDP in 2021 and 2022. Nor Shamsiah, Governor of Bank Negara Malaysia, speaking at a virtual press conference in conjunction with the release of Bank Negara's Annual Report 2020, Economic and Monetary Review 2020 and Financial Stability Review Second Half of 2020, said Malaysia’s GDP recovery would be supported by improving external demand amid technological upswing, less rigorous containment measures and COVID-19 vaccination program, gradual improvement in labor market conditions as well as continued policy support to households and businesses during the year.
The objective of this paper is to examines the impact of COVID-19 outbreak towards Malaysian economic performance by looking into Malaysian GDP and other key macroeconomic variables which are private consumption, government expenditure, investment, exports, imports and unemployment rate.
The findings of this study will aid in a better understanding of COVID-19 impact on the Malaysian economy, as well as assisting policy makers to making the best decisions for economy’s revival and be guided with the MCO measures to ensure that all sectors are well managed. The implementation of the right policy or optimal solution with the right target segment needs to be done by the government to ensure the effectiveness of the government in this impact decision. The expected economic impact for 2021 and the next few years is critical to formulate an appropriate national policy but it is a big challenge because such a huge economic shock has never happened before.
In this paper, the paper is structured as follows. We first summarizes the existing literature on the past pandemic impact to the economy as and studies on COVID-19 pandemic impact to the economy. Section 3 outlines methodology. Section 4 discusses the economic performance of Malaysian GDP and other key macroeconomic variables from quarter 1 2020 until quarter 2 2021. Section 5 summarises the key findings of the article and discusses some policy implications.
2.0 Literature Review
COVID -19 is not the first infectious disease to cause a public health crisis. The problems posed by the health crisis have resulted in direct and indirect economic losses. Previous studies shows that a pandemic or epidemic has a direct and indirect impact on a country’s economy. The intensity of an epidemic or pandemic, as well as the country's outbreak control strategies, determine the effect and expense of the outbreak. There are not much research on the economic effect of infectious disease epidemics in Malaysia since the effect isn't as severe as Spanish flu or HIV in Africa, or the MERS outbreak, but rather isolated instances or a short-term epidemic.
2.1 The economic impact of the previous infectious disease outbreak
The direct impact of disease outbreak is probably the most visible, and it is based on the consumption of health resources and the temporary or permanent withdrawal of individuals from the labor force. This supply shock reduces GDP through reducing employment, which leads to lower output and exports, and through lower imports owing to lower household income and shrinking output.
The Spanish Flu, which occurred in 1918 and is widely recognised as the most expensive pandemic in modern history, has infected about 500 million people, the majority of whom are young people between the ages of 18 and 40. Due to the poor quality of economic data, with most data come from print media, and the fact that the flu outbreak and World War 1 occurred at the same time, many studies find that it is hard to discern between the effects of the Spanish flu and World War 1 to the economic performance. Martin et. al. (2014) find that the pandemic had a strong negative impact on capital income, and led to a significant increase in the poorhouse ratio. It is estimated that real GDP and consumption in a typical country have contracted by 6 – 8 percent (Robert et. al, 2020).
Another significant disease outbreak in history is SARS. The largest economic impact of SARS was related to overall GDP and investment, as well as the hotel, restaurant and tourism sectors.
According to Jong and Warwick (2004), the cost of the SARS pandemic in 2003 was barely 0.1percent of world GDP. The outbreak of SARS has caused the ‘fear of SARS infection’
which has affected the decline in demand, especially in tourism and retail as the speed of the outbreak causes people to avoid socializing. The loss of foreign investor confidence is affecting foreign direct investment and SARS is increasing the cost of disease prevention. The temporary
shock of the SARS outbreak had the biggest impact in China and Hong Kong, where Hong Kong faced GDP loss of 2.63 percent, China of 1.05 percent. The impact is not the result of the outbreak alone, but due to the behavior after the outbreak. The actual costs of an outbreak are greater than just the direct costs of treating the outbreak, as the majority of the costs are likely to be incurred in areas other than health. Although there were significant losses in some Asian countries that were hardest hit by SARS and suffered the greatest losses, the losses lasted only for a relatively short period of the outbreak, and in many cases the economy quickly returned to normal. Therefore, the impact from SARS, was generally relatively short term. (Marcus &
Richard, 2008).
A study by Richard et al (2011) found that the impact of influenza pandemics under mild, moderate and severe scenarios reduced UK GDP by 0.3- 0.6 percent. And when school closures and prophylactic absenteeism were added, were even worse – causing a GDP loss between 2.9 - 3.7 percent. The sensitivity analysis conducted in the study shows that the disease effect mitigation measures are much more impactful and likely to minimise the disease effect.
Another devastating outbreak was West African Ebola virus epidemic, which occurred between 2013 – 2016, costing the most Ebola-affected countries including Liberia, Guinea, and Sierra Leone USD 2.2 billion in GDP losses, with Liberia’s GDP contracting from 5.9 percent to 2.5 percent, Sierra Leone’s from 11.3 percent to 8.0 percent, and Guinea’s from 4.5 percent to 2.4 percent (World Bank Group, 2014).
Some of the lessons learned in previous studies may be applicable to the present incident such as when an epidemic spreads globally and results in a large number of deaths, the economic costs can be significant.
2.2 Impact of COVID-19 outbreak on the economy
Although it is impossible to predict the exact economic impact of the worldwide COVID-19 coronavirus pandemic and with new variants or mutation of the virus keep emerged leaving the economy still swinging and uncertain, economic analysts believe it will have significant negative consequences for the global economy. Travel bans, stringent lockdowns and limitations on variety of activities all had a severe effect on the social and economic cycle.
Since then, government, people and businesses have learned how best to respond to more targeted containment measures to minimise the economic impact. However, there is still a lot of uncertainty about how the pandemic will develop, what will be done to stop it, and what the associated economic impact will be. Various macroeconomic methods/models are used by economists to forecast the expected impact of a pandemic on the economy, including ARIMA, VAR, GE, SIR model. According to the WEO, April 2021 edition, cumulative per capita income losses in emerging and developing economies (excluding China) are expected to be 20 percent of 2019 GDP per capita in 2020–2022 compared to pre-pandemic projections, while losses in advanced economies are expected to be relatively smaller, at 11 percent. The COVID- 19 is demonstrably will demonstrably have a bad impact on the health and economy of the country, just as previous pandemics have caused the same impact. This can be seen from the following studies.
According to Marcus et al., in its study on the impact of COVID-19 on the UK economy found that with the containment approach implemented for 12 weeks resulted in a total cost to the UK economy of £308bn, or nearly 13.5 percent of GDP. While containing the pandemic over a longer length of time may lower mortality by 95 percent, the cost to the UK economy rises to £668bn (29.2 percent of GDP). While government action is needed to reduce mortality, the duration of school and business closures is critical to the economic impact. The UK
government’s initial economic support package could be comparable to the cost of reducing COVID-19. However, without further efforts to reduce the scale and duration of school and business closures, economic support may not be enough to offset the longer-term burden of the pandemic, which could lead to a worsening of the health burden through a major recession.
The same economic downturn is seen in the US, where the performance of the US economy continues to deteriorate for a few months after April 2020, followed by a drop in the employment rate of more than 20 percent, which reaches a low point in August 2020, and the unemployment rate shoots up to more than 20 percent before falling steadily to reach 5 percent in early 2023. Consumption falls by about 20 percent, while industrial output falls by 40 percent. They also predict that consumption will begin to increase after July 2020, but will never fully recover to pre-COVID levels (Giorgio et al., 2020). According to the Malaysian Institute of Economic Research forecast, Malaysia’s real GDP will decline by about 2.9 percent in 2020 compared to 2019, resulting in an expected loss of 2.4 million jobs without a strong economic stimulus. Non-salaried, unskilled employees will account for 67 percent of the workforce.
The impact of COVID-19 impact is expected to reduce India’s GDP growth rate to below 3 percent, and the cost of 21-day nationwide lockdown is equivalent to 1 percent point of GDP (Monika et. al., 2020). Singapore’s Ministry of Trade and Industry announced that Singapore’s economy declined by 5.4 percent in 2020, far worse than 0.5 percent to 2.5 percent GDP growth forecast in November 2019. The economy experienced a plunge as a result of both demand and supply side shocks resulting from the pandemic, including a decline in external demand for Singapore-produced goods and services as a result of the global slowdown and travel restrictions and supply chain disruptions. COVID-19 had a fivefold impact on the Singapore economy: a decline in tourist arrivals and air travel; a decline in domestic consumption; a decline in external demand and supply chain disruptions, labour force disruptions and the need to implement safe management measures; and negative spillover effects from the slowdown in domestic economic activity. As noted in a study by Terrie et al., (2021), obligatory company closures and partial business have opening have a significant influence on the global economy and employment, particularly in the production of non-essential products and services. While a country may have avoided the worst consequences of the COVID-19 pandemic, it cannot prevent the detrimental effects on global supply chains caused by the world’s fall in output and trade.
The COVID-19 pandemic will have a substantial detrimental effect on all countries by 2020 due to the production and export losses that will result from the outbreak. It is necessary to strike a careful balance between the economy and the general well-being of the population.
Even if it is true that the introduction of confinement will significantly restrict economic activity of the country, confinement will also considerably reduce the risk of infection and death in the society. Contrary to this, non-confinement, is likely to result in continuation of economic activity, which will have serious consequences for the country's health environment (Zakaria et al., 2020).
3. Methodology
Our study uses quarterly data from quarter 1 2020 until quarter 2 2021 on GDP and key macroeconomic variables which are private consumption, government expenditure, investment, exports, imports and unemployment rate, to examines the impact of the COVID- 19 outbreak towards Malaysian economic performance.
Data and information used in this paper is secondary data, obtained from official websites such as the World Health Organization, Ministry of Finance Malaysia, Bank Negara Malaysia, Department of Statistics Malaysia, the Ministry of Health, Malaysia External Trade Development Corporation (MATRADE) and material retrieved from reputable online mass media websites. Archival data from journal publications, media stories, official agency or government reports, relevant stakeholder policy papers, published expert interviews, and policy feedback literature related to COVID-19 were also included in this research. We focused on many practical techniques of literature searching utilising appropriate keywords that are important to this work, such as impact of COVID-19, circular economy, economic resilience, sustainability, macroeconomy, pandemic, and so on, to locate the relevant archive data.
Following the identification of relevant articles and documents, the contents were evaluated to decide on inclusions and exclusions based on their relevance to this study.
4. Results and discussion
The Malaysian government has taken various types and levels of containment measures namely Movement Control Order (MCO), Conditional MCO (CMCO) and Recovery MCO (RMCO), to contain the transmission of the virus and strengthen the health system, including social distancing, and domestic and international travel ban. The containment measures and the spread of the disease had a dramatic negative impact on the Malaysian economy. Restrictions to curb the spread of COVID-19 have led to Malaysia’s economy suffering its biggest slump since the Asian financial crisis.
4.1 Gross Domestic Product (GDP)
According to initial forecasts the from the International Monetary Fund(IMF), Malaysia's GDP will contract by -1.7 percent in 2020 and rebound to 9.0 percent in 2021. Malaysia was losing around RM2.4 billion every day since the lockdown took effect. Malaysia has taken similar lockdown measures as the rest of the world to control the rapid spread of COVID-19 infection.
These measures lead to a significant decline in economic activity and the global economic performance definitely impacted Malaysia’s economy as well, disrupting the global value chain activity and subsequently dampening external demand conditions and causing a decline in production that resulted in large income losses for businesses and households. Malaysia’s Q1 2020 GDP grew at 0.7 percent compared to 3.7 percent in Q4 2019, supported by the services and manufacturing sectors, while the rest recorded negative growth. This is the lowest growth since 2009 as we understand that almost all sectors are closed except the essential services sector. The continued fall in oil prices, which was exacerbated by the pandemic is also a contributing factor to the GDP decline. Amid the slump in global demand, domestic demand
recorded steady growth of 3.7 percent attributed to both private and public consumption activities.
Malaysia's GDP shrank 17.1 percent in the second quarter of 2020, compared to 0.7 percent in the first. This is the worst result in over 22 years, since the fourth quarter of 1998, when the Asian financial crisis caused an 11.2 percent decline. With the exception of agriculture, all production sectors saw negative growth. In April 2020, the economy saw a severe downturn, with GDP contracting by 28.6 percent. The economy shrank owing to weak internal demand, which fell by -18.7 percent, as well as a weaker external sector caused by the spread of COVID- 19. In a statement, Bank Negara noted, "The decline reflected the extraordinary impact of the strict containment measures to manage the COVID-19 pandemic internationally and domestically." The gloomy Q2 2020 result indicated that Malaysia's economy is in a deeper- than-expected recession, despite being one of the world's most open countries, with a trade to GDP ratio of over 130 percent. While the slow rebound in the economy that began in May should bode well for a future recovery, low commodity prices, an exterminate tourism sector, and likely cautious consumer spending will likely limit turnaround. Up to May 1, the overall damage was expected to be at RM63 billion. The Government implemented the Prihatin Rakyat Economic Stimulus Package (PRIHATIN) in April 2020, with a budget of RM250 billion, to cushion the effects of COVID-19. This should further mitigate the slowdown, with the economy gradually picking up in Q3 2020.
The assistance to the affected household, including one cash off assistance, deferment of loan repayment, also supporting business including SME by business cashflow assistance and strengthening the economy through domestic investment activities.
GDP is expected to increase in Q3 2020, despite the fact that it is still growing at a negative rate of -2.7 percent. The monthly economic performance throughout the pandemic era was also measured, with July posting a lesser decrease of 2.7 percent, August contracting to a negative 3.6 percent, and September improving to a smaller minus 1.6 percent. The country's economic performance continued to improve in the third quarter of 2020, despite the obstacles of containing the COVID-19 pandemic through the Recovery Movement Control Order (RMCO), which took effect on June 10, 2020 and saw the reopening of most economic sectors and activities. While the improved performance of the manufacturing sector contributed to the increase, other sectors also showed better growth than in the previous quarter.
GDP contracted 3.4 percent in Q4 2020 as compared to a of 2.6 percent in the preceding quarter.
Malaysia's monthly GDP performance in the fourth quarter of 2020 fell by 4.7 percent in October, before slowing in November (-4.0 percent) and December (-1.7 percent). Malaysia's GDP shrank by 3.4 percent in the fourth quarter of 2020, owing to declines in all economic sectors except manufacturing, which had a positive rise in this quarter.
Overall, GDP growth in 2020 will be 5.6 percent, down from 4.3 percent in 2019, due to the collapse of all economic sectors as a result of the COVID-19 pandemic. In general, all sectors recorded negative growth, of which the Services sector contracted by 5.5 percent, Manufacturing contracted by 2.6 percent, Agriculture declined by 2.2 percent, Construction and Mining & quarrying recorded -19.4percent and -10.6 percent respectively.
Malaysia's GDP decline at a considerably slower rate of 0.5 percent in Q1 2021, continuing its comeback from a -3.4 percent the previous quarter. The Malaysian economy rebounded in this quarter as economic activity picked up under the MCO 2.0, which is less stringent than
MCO 1.0 and supported by stimulus packages. Discretionary income from the withdrawal of the i-Sinar and i-Lestari and a rise in commodity prices such as oil palm and rubber strengthened the economy.
Malaysia’s GDP increased significantly at 16.1 percent in the second quarter of 2021 after four consecutive quarters of contraction. The country's economic growth was bolstered mostly by improved domestic demand and continued strong export performance. Economic activity picked up at the start of the second quarter where April and May rose to 40.1 percent and 19.8 percent respectively, but June, GDP dropped 4.4 percent , influenced by MCO 3.0 tightened Standard Operating Procedure (SOP) and only essential services were allowed to operate. The manufacturing industry led the way with gains across the board. As a result of stronger external demand, the economy performed well in the second quarter of 2021, supported by a rebound in global trade. Based on the growth recorded, the level of economic value in this quarter remained lower than the pre-pandemic level of Q4 2019. Hence, Malaysia’s economy grew by 7.1 percent in the first half of 2021 compare to last year at -8.4percent.
With recent global economic event, Bank Negara Malaysia (BNM) has included COVID-19 vaccination program rate and health system capacity in projecting economic growth in Malaysia. In light of this, Malaysia's GDP is expected to grow by 3.0 percent to 4.0 percent in 2021. The revised growth estimates are lower than the previously reported growth range, due in large part to the reintroduction of the nationwide restrictive movement measures. The positive growth will likely be driven by external demand led by an improving global economy while domestic demand, particularly private consumption and private investment continued to be weighed down by lockdown and inability to contain the pandemic.
4.2 Private Consumption
COVID-19 pandemic had a significant impact on how and where people spent their hard- earned money. According to a survey conducted by the Malaysian Department of Statistics, the COVID-19 pandemic has affected 96.3 percent of respondents' lifestyles. Stricter lockdown measures had a significant impact on company operations, causing some companies to cut their workforce consequently impacted household income and spending. Private consumption is a significant driver of Malaysia’s economic growth accounting for around 50percent - 60percent of the country's GDP.
In Q12020, private consumption decreased from Q4 2019: 8.1percent to 6.7percent , due to reduce in consumption of petrol, travel, recreation and outside food consumption. Cash aid assistance and the cut in OPR help the spending and cushion the impact of MCO 1.0 movement restriction. Private consumption fell by 18.5 percent in Q22020, owing to lower household expenditure as a result of MCO implementation and income losses due to unfavourable labour market circumstances. The adoption of the loan moratorium, as well as Prihatin Nasional cash aid and EPF i-Lestari withdrawals, helped to cushion consumption expenditure. The private consumption expenditure posted a smaller decrease 2.1 percent backed by the expenditure on essential items such as Food & non-alcoholic beverages; Housing, water, electricity, gas and other fuels and Communication. Furthermore, non-essential expenditures such as recreation and cultural services, restaurants and hotels, and furnishing, home equipment, and routine household maintenance exhibited a better negative growth in this quarter. The lower price of automotive fuels and competitive prices offered by tourism products has encouraged the domestic travel activities within states. In addition, active online shopping activities of households have boosted private consumption performance. Consumption of
Transport has also lifted to smaller decline owing to substantial growth in the number of automobiles purchased that consumers as a result of the sales tax exemption.
Private consumption, which accounts for 58percent of GDP, fell by 3.4percent in Q4 2020, mostly to a fall in non-essential spending. During the quarter, however, spending on basic commodities such as food and non-alcoholic drinks; housing, water, power, gas and other fuels;
and communication increased. Households' active internet purchasing activities have also aided private consumption performance.
In 2020, private spending in Malaysia accounted for 75.2 percent of the country's GDP. Private consumption growth fell to 4.3 percent in 2020 from 7.6 percent in 2019, but is expected to increase to 8percent in 2021. Domestic containment measures introduced at the beginning of March 2020, according to the central bank's annual report, had a substantial impact on private consumption growth. According to BNM, a decline in fundamental expenditure drivers such as income and employment would reduce private consumption in 2020,as spending was attributed by softer labour market conditions and weaker consumer sentiments.
As moving to Q1 2021, private consumption reported a smaller decrease of 1.5 percent influenced by reduced household spending due to reimplementation of strict containment measures, MCO 2.0. Although MCO 2.0 implemented, household spending was better compared to MCO 1.0 given less restrictive containment and most economic sectors were allowed to operate. Non-essential spending fell at a slower pace in this quarter. As the fight against COVID -19 continues, health care spending rose a bit after declining for three straight quarters. And in Q2 2021, where private consumption contributed 55% of GDP, consumption grew 11.6 percent due to increased consumption in transportation, food and non-alcoholic drinks, and communication. High spending in transport due to higher purchases of motor vehicles in the first 2 months of the quarter compared to the same period last year. Non- essential expenditure recorded positive growth during the quarter.
Labour market conditions are anticipated having significant role in the recovery of private consumption as broad economic improves, according to the BNM Annual Report, with the assistance of continued policy to ease labour mobility and minimise long-term labour market dislocations.
4.3 Government Expenditure
Malaysia's overall government expenditure in 2020 was RM315 billion, up from RM297 billion in the initial budget, since the government was forced to adopt an enormous expansionary fiscal policy to boost the economy because to the protracted COVID-19 pandemic crisis. For Q1 2020, the government expenditure increase from 1.3percent in Q4 2019 to 5.0percent resulting from higher spending on supplies and services. And as for Q2 2020, while other demand components declined, government expenditure recorded a positive growth of 2.3percent . This is attributed by higher expenditure related to health, safety and security sectors. And increase to 6.9percent in Q3 2020. Due to reduced spending in supplies and services in Q4 2020, the expenditure expanded at 2.7percent . The expenditure also account for emoluments mainly to meet the staff requirements in critical sectors as well as stimulus spending.
And as moving to Q1 2021, the government expenditure rose to 5.9percent due to higher spending on fixed assets by Federal government in this quarter, as well as healthcare and
security sectors. And further expanded to 9.0percent in Q2 2021 supported by higher spending on supplies and services attributed to the health-related expenditure in this quarter.
4.4 Investment on Fixed Asset
Total investment shrank by 12.2percent in 2020 due to weaknesses in both private and public investment, attributed by the movement restriction as well as weak investors’ confidence amid arising uncertainties surrounding COVID-19.
In Q12020, investment posted a -4.6 percent (Q4 2019: -0.7percent ) due to the sharp decline in all three segments such as structure, machinery & equipment and other assets. Also due to lower capital spending from both the private and public sectors due to weak global demand conditions and disruptions to supply chains, ongoing investment projects stopped due to MCO 1.0. And in Q2 2020, the investment further contracted 28.9percent . In Q3 2020, the investment show improvement at -11.6percent where recovery supported by the resumption of construction activity as the gradual lifting of movement restriction, even still due to lower capital outlays, affected by uncertainty following prolonged COVID-19 outbreak. Growth was also strengthen by capital spending in the Electrical & Electronics (E&E) and health care related sectors. In view capital spending from both private and public sectors remained weak especially in the services and manufacturing sectors, the investment recorded -11.9percent , slightly dropped from the previous quarter.
And as moving to Q1 2021, the investment registered a smaller contraction of -3.3percent supported mainly by the recovery in capital spending from the private sector. The recovery indicated an improving trend which was backed by expansion growth in Machinery &
equipment at 10.3percent compared to -9.0percent in Q4 2020. The gradual improvement of investment can be seen as a catalyst for higher economic capacity to uplift the production of the future output. The investment recorded of tremendous growth of 16.5percent for Q2 2021, supported by continued capital spending in telecommunication related equipment, continued progress in national digital infrastructure investments, increase investment in the export- oriented industries such as E&E and metal.
4.5 Export
In real terms, exports of goods and services decreased by 8.8percent in2020, due to poor external demand, supply chain disruptions, and a significant reduction in tourism. Exports of oil products and manufactured goods dropped in comparison to the same period last year;
however, the drop was less steep for machinery and transportation items. The decline in exports was more pronounced from January to June, but the pace of contraction slowed from July to December as shipments of electronics and medical items increased.
Exports fell by -7.1 percent in Q1 2020, compared to -3.4 percent in Q4 2019. Beginning in January 2020, our shipments to China have been drastically reduced. As a result of the reduction in visitor visits to our nation, services exports have also showed a downward trend.
Malaysia's goods exports in the first quarter of 2020 totalled RM238.7 billion, up 1.1 percent from RM236.1 billion in the same quarter of 2019. Refined petroleum products and palm oil and palm oil-based products, which rose by 43.0 percent and 4.6 percent, respectively, were the main contributors to the growth. Exports fell by -21.7 percent in Q2 2020 as a result of global supply chain disruptions caused by the shutdown, which resulted in weak demand from major trade partners and lower commodity prices, affecting manufacturing for export-oriented based sectors. Malaysia's export performance in June 2020 shows signs of recovery from the
COVID-19 pandemic impact, with positive growth. The lacklustre demand has had an impact on manufacturing for export-oriented sectors.
Exports increased by -4.7 percent in Q3 2020, owing to a positive performance attributable to export-oriented businesses, with recovery in products driven by stronger E&E exports at 16.0 percent , compared to -9.5 percent in Q2 2020. Exports of services, on the other hand, have remained muted since international borders remain closed to tourism activity. As long as the borders remain blocked to tourism, service exports will continue to decline. Exports improved by -1.8 percent in Q4 2020, with E&E exports contributing to the continued positive growth, owing to strong demand for semiconductors for work from home appliances and medical apparatus. In terms of international trade for this quarter, net exports remained positive at 12.4 percent , boosted by increased external demand, with exports growing faster than imports.
Moving forward to Q1 2021, exports of products are up 11.9 percent , indicating healthy development in export-oriented industries. Meanwhile, service exports have continued to fall as national borders remain closed to travel. Domestic economic activity is progressively strengthening, and as a result, exports are improving. Externally, strong external demand, notably for E&E goods, led to continuing net export growth. Export showing tremendous growth at 37.4percent in Q2 2021 where positive external demand fuelled robust exports across all goods and markets. Strong demand for chemical and petroleum products, manufactures of metal and machinery, and equipment and parts of 55.5 percent compared to 19 percent in Q1 2021 boost the manufacture export. Most countries indicated gradual economic recoveries as the opening up of economic activities in more countries indicating improved external demand.
With these external scenarios and the low base in May 2020, Malaysia’s trade in May 2021 continued to surge year-on-year, recording an increase of 48.7 percent and maintained its double-digit growth for four consecutive months. Exports grew 47.3 percent to RM92.3 billion in May 2021 from RM62.6 billion in May 2020.Malaysia’s exports increased by 47.3 percent , driven by a rise in domestic exports which increased 45.9 percent and re-exports that strengthened by 56.1 percent . The rise in exports was mainly attributed to the higher exports to Singapore which increased by RM4.1 billion, followed by the United States (US) (+RM3.3 billion), India (+RM3.0 billion), Japan (+RM2.1 billion) and China (+RM2.1 billion) as compared to a year ago. China, Singapore, the US and the European Union (EU) continued to be Malaysia’s major trading partners in May 2021 with total contribution of 48.9 percent (May 2020: 51.9percent ). The main contributors to the export increase were Electrical and electronic (E&E) products (+RM8.1 billion, +34.3percent ), Rubber gloves (+RM3.4 billion, +159.8percent ), Palm oil & palm oil-based products (RM2.7 billion, +51.9percent ) and Refined petroleum products (+RM2.7 billion, +83.4percent ). E&E products, palm oil & palm oil-based products and Refined petroleum products were the main exports products of Malaysia in May 2021 comprising a share of 49.1 percent (May 2020: 51.9percent ).
4.6 Imports
Imports fell by 8.3 percent in 2020, due to weak local demand and disruptions global manufacturing networks and regional supply chains. In Q1 2020, import dropped by 0.1percent ( at -2.5 percent ) compared to Q4 2019 which recorder -2.4 percent . Imports of intermediate goods and consumption goods recorded positive growth, however, imports of capital goods declined by 26.8 percent which affected the overall import growth for this quarter. Import further dropped -19.7 percent for Q2 2020 due to lower in intermediate and consumption import due to weaker manufacturing activity. Imports of products increased and showed a smaller drop of -7.8 percent in Q3 2020, but imports of services continued to decline due to fewer outgoing travellers. Higher imports of industrial supplies, as well as fuel and lubricants,
have contributed to the improvement, which coincides with a resurgence in manufacturing activity. And consumption imports grew driven primarily by higher imports of consumer durable goods. Q4 2020 showing recovering in imports and recorded at -3.3 percent , primarily due to moderate contraction in intermediate imports (higher import of industrial supplies).
Lower domestic investment activity and household spending resulted declined in capital imports and consumption imports.
As moving to Q1 2021, imports showing robust growth at 13percent due to the improvement in all import areas driven by capital import increased higher imports of telecommunications equipment and machinery and increase in industrial supply imports. Import recorded another robust growth of 37.6percent in Q2 2021 due to stronger expansion of intermediate imports.
Intermediate imports increased owing mostly to greater imports of industrial inputs, which coincided with a quicker rise in local manufacturing activity. However, negative growth recorded in capital imports at -8.3percent . China continued to be a major contributor to the increase in imports (+RM7.6 billion), followed by Singapore (+RM2.6 billion), Taiwan, (+RM1.9 billion), Republic of Korea (+RM1.7 billion) and Japan (+RM1.7 billion). Imports continued to surge in May 2021, posting a rise of 50.3 percent to RM78.6 billion compared to RM52.3 billion in May 2020. The main products of Malaysia’s imports in May 2021 were E&E products, refined petroleum products and flat rolled products of iron or steel with a collective contribution of 40.6 percent .
4.7 Unemployment rate
For 2020 overall unemployment rate was at 4.5percent compared to 2019, 3.3percent . This is highest unemployment rate since 1993. IMF in WEO April 2021 report stated that projection for Malaysia unemployment rate for year 2021 is 3.8percent and 2022 at 3.6percent .
As Q1 2020 was an initial phase of COVID-19 outbreak, there is slight increase of unemployment rate at 3.5 percent compared to 3.2 percent in Q4 2019. MCO 1.0 affected employment growth rate in the last 2 weeks of March 2020 and worsened due to slow down in tourism related sector. In Q2 2020, Malaysia recorded highest unemployment rate at 5.1 percent , where the labor market worsened due to MCO and drop in demand caused firm response to cost cutting initiative and tourism related sector as highest contribute to job losses, followed by manufacturing sector. In Q3 2020, the unemployment rate fell from 5.1 percent to 4.7 percent as labour market conditions progressively improved. As demand circumstances normalised, and favourable rehiring activity, employment growth recorded a smaller
contraction of 0.4 percent compared to Q2 2020 which recorded -1.3 percent. With a placement rate of 22 per 100 workers retrenched, the Employment Insurance System (EIS) recorded fewer job losses in Q3 2020 (33,309 employees). Placement rate refers to the number of people placed in new jobs under the EIS programme for every 100 employees laid off. In Q4 2020, the unemployment rate increased slightly to 4.8 percent, with improving labour market conditions in October, before deteriorating in November and December as a result of the re-imposition of mobility restrictions. The unemployment rate is remained at for 4.8 percent in Q1 and Q2 2021, even though MCO 2.0 & MCO 3.0 reimplemented in 2021, however most of the economic activities continued to operate in compliance with strict SOPs. There is improvement in labour market in the first half quarter prior to MCO 3.0 in June. EIS recorded lower jobless claims which mean lower retrenchment, and improved placement rate : 40 per 100 people retrenched as compared to Q1 2021.
Given the recent health-containment measures implementation to curb the very high number of COVID-19 cases, economic sectors are anticipated to struggle to maintain their recovery momentum, while the tourism-sector is likely to have a very long road to recovery. It is therefore inevitable that the labour market may experience uneven scenario in the coming months depending on the stage of the pandemic. However, efforts are being made to ensure that more people get vaccinated under the National COVID-19 Vaccination Programme so that the country achieves herd immunity by the end of the year. The government has taken a number of measures to revive economic activity in order to improve the labour market situation in the coming months.
5.0 Conclusion
COVID-19 has had a catastrophic influence on the economy of Malaysia, as evidenced by the performance of the country's GDP and macroeconomic indicators in the second quarter of 2020. Considering that fiscal stimulus has only a short-term impact on growth, substantial and credible fiscal support, combined with an accommodative monetary policy, not only in the short term but also in the medium term, is required to mitigate the impact of COVID-19 and to support an economic recovery that is long-term and sustainable. Fiscal policy should continue to be supportive of the epidemic until it is eradicated. Fiscal policy assistance should be properly targeted and calibrated to the stage of the pandemic and the policies should support COVID-19 recovery efforts as well as the establishment of a more robust social protection system.
To increase economic resilience, the government should implement COVID-19 adaption measures. Because of the continued uncertainty surrounding the dynamics of the pandemic, including as the success rate of vaccination programmes throughout the world, a sustained economic recovery is not guaranteed. Following the implementation of lockdown measures to combat the COVID-19 pandemic, the Asian Development Bank (ADB) has lowered Malaysia's growth projection for 2021 down from 6 percent to 5.5 percent.
Economic sectors in Malaysia are expected to continue to face enormous problems as a result of the protracted outbreak of the COVID-19, which has resulted in a high number of daily cases. It requiring serious attention from the government in structuring and executing an effective plan to manage the COVID-19 pandemic cases in order to allow the economy to recover. Apart from fiscal support, healthcare spending should remain a priority where the fastest way to recover the economy is to contain the pandemic, so timing the vaccine is critical.
Because vaccination will clearly eliminate the need for mandatory closures, restricted
economic activities, and avoidance behaviour, the government should make sure that the vaccination programme is on track and monitored systematically. As COVID-19 pandemic is a global crisis that necessitates a global effort and collaboration to overcome and manage not only on health sector impact as well as trade and macroeconomic policies.
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