Malaysia's economy shrinks the most since 1998 Asian financial crisis

MALAYSIA'S economy contracted by the most since the Asian financial crisis more than two decades ago, with the central bank sharply downgrading its outlook for this year.

Gross domestic product shrank 17.1 per cent in the second quarter compared to a year earlier, its worst showing since the fourth quarter of 1998, the central bank said on Friday.

That compared to the median forecast of a 10.9 per cent contraction in a Bloomberg survey of economists.

The data show the severe knock the trade-reliant economy has taken during the Covid-19 outbreak.

Exports plunged because of the disruption to supply chains, while consumer spending slumped amid an extended lockdown. The central bank now expects the economy to contract 3.5 per cent to 5.5 per cent this year, compared with a previous growth range of 0.5 per cent to -2 per cent.

"The decline in output was massive," said Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd. "It clearly shows that the pandemic has resulted in the economy to be at a standstill."

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The performance meant that Malaysia has logged the largest year-on-year contraction in the region so far, despite less restrictive movement control measures.

"The slump in oil prices and political turmoil have been additional headwinds for investment, export receipts and the government's response," said Bloomberg's Asean economist Tamara Mast Henderson. "We expect Bank Negara Malaysia to cut its policy rate by at least 25 bps at the next meeting in September."

The economy began to show signs of recovery at the tail end of the quarter.

Manufacturing production and sales growth turned positive in June and the unemployment rate fell to 4.9 per cent.

"Activity has picked up following an easing in lockdown measures from May onwards, and we expect a solid post-lockdown rebound in growth" in the third quarter, Oxford Economics economist Sian Fenner wrote in a research note.

"That said, the speed of the recovery will likely ease back after that amid depressed global trade, high unemployment and weak investment."

Governor Nor Shamsiah Mohd Yunus said in a briefing on Friday that she's "cautiously optimistic that the worst is behind us".

The full-year forecast was cut because the pandemic had a bigger impact on global demand than previously assumed and Malaysia's lockdown was extended.

The government is seeking to raise its debt limit for the first time since 2009 to fund its fiscal stimulus.

The central bank also has cut interest rates several times this year to help cushion growth.

"Should there be a second outbreak, there is room for targeted policy measures to complement the ones implemented earlier," the governor said. "For example, the bank's policy levers can be expanded or extended within this mandate." BLOOMBERG