SERC: Malaysia’s economic recovery projected to hit a soft patch in second half of 2022

·4-min read
Malay Mail
Malay Mail

KUALA LUMPUR, July 12 — The country’s economic recovery is expected to hit a soft patch in the second half (H2) of the year, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said

Based on SERC’s forecast, Lee said this is expected due to weakening global growth, rising inflation, a higher cost of living, increased costs and labour shortage.

Lee said although the first quarter (Q1) of 2022 was off to a good start, increased costs, a spike in raw material prices and the shortage of workers held back companies from bolstering production and restocking.

“This will take a toll on consumer spending and business investment. Increasing prices of goods and services are expected to cramp the lower and middle-income households’ spending power, leaving them with reduced disposable income for spending.

“Soaring cost of raw materials, supply disruptions, higher operating costs and worker shortage have impacted businesses’ working capital and cash flow.

“These costs and supply constraints coupled with lingering concerns about the rising risk of a US recession and the consequential impact on the domestic economy, businesses and investors as they would adopt cautious stance amid increasing expectations of the 15th general election will be called soon,” Lee told reporters in a media briefing today.

He added that while exports may still be going strong, growth will moderate in H2 2022 due to the weakening global economy, impact of monetary tightening, and moderating prices.

“We have revised our export growth to 10.2 per cent in 2022 (26 per cent in 2021).

“We are also keeping our Gross Domestic Product (GDP) estimate of 5.2 per cent in 2022 (3.1 per cent in 2021), expecting a moderate pace of economic growth between 4.5 per cent/5.0 per cent in H2 versus estimated 5.0 per cent/6.5 per cent in H2 2022,” he said.

Lee, however, warned that entering H2 2022 and 2023, there is a growing danger of global stagflation, and the US economy could slip into recession, while stronger consumer prices and cost pressure as well as the rising cost of living are expected to weigh on domestic demand.

“We expect Bank Negara Malaysia (BNM) to continue its gradual and measured pace of policy rate adjustments, depending on the incoming data, assessing the implications of evolving eternal and domestic developments on economic growth prospects and inflation trajectory, especially to anchor inflation expectations,” he said.

He added that SERC also expects BNM to raise the overnight policy rate (OPR) by another 25 basis points (bps) to 2.5 per cent at the end of the year.

“Prolonged periods of low interest rates can induce financial imbalances by reducing risk aversion of banks and other investors as well as borrowers,” he said.

Recently, BNM raised its OPR for the second time this year to 2.25 per cent in its July meeting, marking two successive rate hikes.

To mitigate higher cost of living, Lee has suggested that the government address the Malaysian population using two targeted approaches.

For the bottom 40 (B40) households Lee said the government should upgrade benefits or provide direct cash transfers to distressed households, shielding them from price increases that are deemed inevitable in the short-term due to rapidly rising costs.

“Provide a one-off cost of living tax offset or a one-off cost of living cash payment for the poor households in need.

“Reduce out-of-pocket expenses for the elderly through higher tax allowance and reduce the increasing cost access to medicine (drugs and health supplements),” he said.

As for middle 40 (M40) households, he suggested that the government extend a tax rebate of RM400 to individual taxpayers with chargeable income not exceeding RM70,000 to ease some tax burden.

“To increase personal relief for contribution to the Employees Provident Fund to RM7,000 from RM4,000; and to RM5,000 from RM3,000 for life insurance premiums.

“Increase child relief to RM3,000 from RM2,000, personal relief of RM3,000 for housing loan interest payment for YA 2022 and 2023, and house rental payment to be given a personal tax relief of up to RM4,000 annually,” he said.

As for concerns on inflation, Lee said SERC estimates headline inflation to increase by 3.0 per cent to 3.5 per cent in 2022. He however said Malaysia’s inflation remain manageable as compared to other neighbouring countries due to various administrative measures such as subsidies and price ceiling on cooking oil, fuel, chicken and eggs, electricity and gas.

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