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PETALING JAYA: There is a reserved optimism in the air. The contraction in the economy is starting to improve and this is expected to lead to real growth in the coming months.
However, the recent surge in Covid-19 infections that led to the implementation of the improved motion control order in some areas of Sabah remains a cause for concern, according to the Socio-Economic Research Center (SERC).
In an online media briefing yesterday, SERC said the economy had started to stabilize after the impact of the pandemic earlier in the year.
“The worst of the economic contraction in the second quarter is behind us. Malaysia’s real gross domestic product contracted sharply by 17.1% year-on-year in the second quarter of 2020, the deepest drop in a quarter.
“What caused an economy of RM 1.5 trillion to stop in the second quarter was the ‘sudden stop’ of economic and commercial activities due to the motion control order.”
But, SERC said that recent economic indicators show signs of recovery, albeit unevenly, adding that the 2021 Budget to be presented on November 6 should point to a specific fiscal expansion.
The fiscal position will be the key policy variable going forward to support domestic demand. There are five risks that can moderate the global recovery and damage the country’s economy, he said.
“As the global economy is in an early stage of recovery, it remains susceptible to shocks and events that can undermine investor confidence and cause a shift in market sentiment.
“One of the five key risks is a new lockdown to control a sharp increase in infections, which may threaten global recovery. A premature withdrawal of fiscal stimulus and monetary accommodation will also hurt the economy. “
He said central banks are expected to remain in accommodative mode for some time. “The fiscal stimulus is still necessary since a reduction in the demand of the public sector will cause a new contraction of the economy.
“A sudden reversal of positive investor optimism in equity markets due to concerns about a worsening economic outlook could trigger strong capital outflows and tighter global financial conditions.”
Uncertainties persist over tensions between the United States and China over trade and technology, as well as political relations, and geopolitical events could also have a negative impact on the economy, SERC added.
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