Malaysia tipped to enter technical recession in Q3: analysts

MALAYSIA is likely to slip into a technical recession in the third quarter of this year, although economists believe the economy could make a turnaround in Q4 thanks to a gradual lifting of Covid-19 restrictions.

Private sector economists polled by Bloomberg are expecting a 0.6 per cent quarter-on-quarter decline in Q3, extending the 2 per cent contraction seen in the previous quarter.

A technical recession occurs when gross domestic product (GDP) contracts on a sequential basis for 2 consecutive quarters.

On a yearly basis, the economy is expected to have shrunk 1.9 per cent, according to the Bloomberg poll, while a similar Reuters poll pegged the contraction at 1.3 per cent.

However, Reuters noted that forecasts for Q3 ranged from a 6 per cent contraction to 1 per cent growth, "underscoring widespread uncertainty around the economic impact of the Covid-19 pandemic".

In Q2, GDP jumped 16.1 per cent year on year in Q2 due to low base effects.

Barclays regional economist Brian Tan said he is revising his projection for Q3, believing it to be on track for a 3.2 per cent decline rather than his earlier estimate of 6 per cent.

"Newly released data show services sector activity weakened substantially in Q3, but not by as much as we had expected," Tan said, although he pointed out that his prediction is still bleaker than the consensus forecast.

UOB economists Julia Goh and Loke Siew Ting downgraded their real GDP projection, anticipating a 4.3 per cent fall now instead of their earlier estimate of 3.5 per cent.

"July to September economic indicators suggested that Malaysia's economy lost traction in Q3 due to the reintroduction of a nationwide lockdown and weak investment sentiment during the quarter," UOB economists said.

All sectors are expected to see contractions, with construction likely to be the biggest loser.

Other than Vietnam, Malaysia is expected to underperform most of its regional peers in Q2, including Indonesia, the Philippines and Singapore.

Still, UOB believes the technical recession is unlikely to extend into Q4 as containment measures were lifted and most economic and social activities have been allowed to reopen in this quarter.

"The improved outlook is augmented by broader vaccine coverage, supportive global demand, Malaysia's transition to an endemic phase, normalising domestic demand, resumption of infrastructure spending and further fiscal support," said UOB.

Both UOB and Barclays are keeping their full-year GDP outlook to 4 per cent, which is also the upper band of Bank Negara Malaysia's (BNM) forecast range of 3 to 4 per cent.

Tan said: "The 2022 budget had also assumed GDP growth of 3 to 4 per cent this year. In our view, BNM is unlikely to adjust its 2021 GDP growth forecast range on Nov 12 when the Q3 GDP data is released."

He added that the central bank is expected to leave its policy rate unchanged at 1.75 per cent until Q1 2022 before normalising monetary policy in Q2.

UOB economists said potential downside risks could come in the form of new virus variants, a slower China economy and regulatory tightening, commodity price shocks, energy supply crunch, elevated inflation, heightened volatility amid tighter global monetary policy and geopolitical risks.