Malaysia's economy returns to contraction, shrinking 4.5% in Q3 as Covid-19 curbs hit

Kuala Lumpur

MALAYSIA'S economy returned to contraction in the third quarter, the first South-east Asian economy to report a renewed slump, amid a protracted lockdown and a spike in Covid-19 cases.

Gross domestic product (GDP) in the three months ended September shrank 4.5 per cent from a year earlier, Malaysia's central bank said on Friday (Nov 12). Compared to the previous three months, GDP fell 3.6 per cent on a seasonally adjusted basis.

The slowdown was seen across all segments of the economy, Nor Shamsiah Yunus, governor of Bank Negara Malaysia, said in a briefing, adding that monetary policy will remain accommodative to provide support and ensure price pressures are manageable.

Despite last quarter's slump, the central bank reaffirmed the government's outlook for economic growth this year at 3-4 per cent, with headline inflation at 2-3 per cent. It also reiterated the official 2022 outlook for GDP to expand 5.5 per cent-6.5 per cent.

"Progressive lifting of containment measures and continued improvements in the labour market will be key to support the recovery going forward," Shamsiah said, adding that growth will improve in the fourth quarter.

The outlook comes days after Malaysia announced a Vaccinated Travel Lane with Singapore that will begin on Nov 29. There is also an agreement to begin a travel corridor with Indonesia early next year.

Malaysia's rapidly widening vaccine coverage has allowed the local economy to reopen in recent months, with all but two states in the final phase of the government's national recovery plan.

The nation is also set to reopen the tourist haven of Langkawi islands to overseas visitors on Monday under a pilot project. The government will evaluate the project before emulating it in other tourist spots in the country, Prime Minister Ismail Sabri Yaakob said last month.

The government in October unveiled a record US$80 billion spending plan for next year as it seeks to spur the long-delayed economic rebound, and allocated RM23 billion (S$7.5 billion) for Covid stimulus measures alone.

The central bank last week maintained its benchmark policy rate at a record low of 1.75 per cent, supporting a nascent economic recovery as virus curbs ease and inflation remains under control. Headline inflation is likely to remain moderate next year, Shamsiah said, and added that the bank will be mindful of any premature withdrawal of monetary support.

Risks remain for the government's growth outlook. Two upcoming state elections in Malacca and Sarawak could undo the recent drop in new Covid infections to the fewest since early June.

The reproduction factor of the virus, known as R-naught, has climbed back to the key threshold of 1, and the government is monitoring hospital admissions and other leading indicators, Health Minister Khairy Jamaluddin said in a tweet on Friday. His ministry has issued fines as campaigning politicians violated virus protocols ahead of voting day on Nov 20.

A spike in cases after an election in Sabah state last year fuelled public anger against former premier Muhyiddin Yassin, helping to precipitate the fall of his government in August. BLOOMBERG