Economy may contract by 4% this year, says Asian Development Bank

The Asian Development Bank report states that Malaysia is expected to experience deflation at 1.5% in 2020 as oil prices are likely to remain low. (AFP pic)

KUALA LUMPUR: The Malaysian economy is expected to contract by 4.0% this year before recovering to grow by 6.5% in 2021, the Asian Development Bank (ADB) said.

In its Asian Development Outlook Supplement released today, the ADB said the country’s external demand is likely to be weak as trade partners continue to grapple with the effects of Covid-19.

“Growth in Malaysia fell to just 0.7% year-on-year in the first quarter (Q1) of 2020.

“As the Covid-19 pandemic affected global supply chains in Q1, exports of goods and services shrank by 7.1%, and investments also declined as public and private investments fell by 11.3% and 2.3% respectively,” it said.

Nevertheless, it noted that consumption remained as a bright spot in the economy, growing by 6.5% as stronger public consumption offset weaker private consumption.

“However, with movement throughout the country restricted since March 18 to arrest the spread of Covid-19, domestic consumption is expected to contract in Q2,” it said.

The report said Southeast Asian countries experienced a broad decline in consumption, investment, and trade following the battle against Covid-19, while all subregional economies decelerated under movement restrictions imposed by governments to contain the pandemic.

“The more open economies of Malaysia, Singapore, Thailand and Vietnam were hit by slumping global trade and demand.

“Additionally, tourist arrivals plunged in response to stringent travel restrictions and quarantine requirements; eviscerating the aviation, hospitality and retail industries,” it said.

Although most countries in the subregion have started to relax restrictions, ADB said weak consumer confidence may hinder economic recovery, while external demand is expected to remain muted for the rest of this year as the global economy contracts.

Meanwhile, the report stated that Malaysia is expected to experience deflation at 1.5% in 2020 as oil prices are likely to remain low, before crossing back to inflation at 2.5% next year.

“Inflation forecasts for Southeast Asia are revised down to 1.0% in 2020 and adjusted slightly up to 2.3% in 2021,” it said.

ADB said global oil prices have caused domestic fuel and energy prices to slump, particularly in Malaysia, Singapore, Thailand, and Vietnam, mired by the huge drop in transportation costs brought by plummeting petrol prices.

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