Economic and Financial Developments in Malaysia in the First Quarter of 2021Embargo : For immediate release Not for publication or broadcast before 1200 on Tuesday, 11 May 2021
11 May 2021
Better economic performance, with smaller GDP decline of 0.5% in the first quarter (4Q 2020: -3.4%)
The Malaysian economy registered a smaller decline of 0.5% in the first quarter (4Q 2020: -3.4%). The growth performance was supported mainly by the improvement in domestic demand and robust exports performance, particularly for E&E products. Growth was also supported by the continued policy measures. The imposition of the Second Movement Control Order (MCO 2.0) and the continued closure of international borders and restrictions on inter-state travel, however, weighed on economic activity. Nevertheless, as restrictions were eased in February and March, economic activity gradually picked up. Governor Datuk Nor Shamsiah said “The better overall performance reflects the improvement in domestic demand and the strength in our exports.”
All economic sectors registered an improvement, particularly in the manufacturing sector. On the expenditure side, growth was driven by better private sector expenditure and strong exports. On a quarter-on-quarter seasonally-adjusted basis, the economy registered a growth of 2.7% (4Q 2020: -1.5%).
Headline inflation turned positive to 0.5% during the quarter (4Q 2020: -1.5%). This was attributable to the positive albeit low fuel inflation following the base effect, as well as the lapse in the effect from the tiered electricity tariff rebate which was implemented between April to December 2020. Core inflation moderated to 0.7%, mainly reflecting the lower inflation for rental and jewelleries.
Exchange rate developments
The ringgit depreciated by 3.5% against the US dollar in the first quarter of 2021. This was due mainly to the strengthening of the US dollar, which also resulted in a broad-based weakening of other advanced and emerging market currencies. This was amid the rebalancing of portfolio investments by global investors following the rise in US Treasury yields, driven by anticipation of a stronger US economic recovery and higher inflation expectations. Since 1 April, the ringgit has appreciated by 1.0% against the US dollar (as at 7 May). This appreciation was in line with US dollar strength subsiding as US Treasury yields have started to trend lower from its peak in March. The increase in global oil prices in early April also provided some support to overall investor sentiments. Going forward, as uncertainties remain on the momentum of the global and domestic economic recovery, the ringgit is expected to remain exposed to periods of heightened volatility.
Net financing to the private sector recorded an annual growth of 4.7%1 during the quarter, supported mainly by higher total outstanding loan growth of 4.3% (4Q 2020: 3.7%). Business loan disbursements and repayments remained above their 2017-2019 quarterly average levels. Household loan demand also remained forthcoming amid the accommodative monetary policy environment and implementation of various stimulus measures.
The Malaysian economy remains on track for a recovery in 2021, supported by better external and domestic demand
Despite the recent re-imposition of containment measures, the impact on growth is expected to be less severe than that experienced in 2020, as almost all economic sectors are allowed to operate. Overall, the growth recovery will benefit from better global demand, increased public and private sector expenditure as well as continued policy support. This will also be reflected in the recovery in labour market conditions, especially in the gradual improvement in hiring activity. Higher production from existing and new manufacturing facilities, particularly in the E&E and primary-related sub-sectors, as well as oil and gas facilities will provide a further impetus to growth. The roll-out of the domestic COVID-19 vaccine programme will also lift sentiments and contribute towards recovery in economic activity. Nevertheless, the pace of recovery will be uneven across economic sectors. Datuk Nor Shamsiah cited “Going forward, Malaysia is well positioned to continue benefitting from stronger global economic and trade activities. While the growth outlook continues to be shaped by developments surrounding the pandemic, the implementation of containment measures which are mainly aimed at curbing social activities and allow almost all economic sectors to operate, would minimise the impact on economic activity.”
In 2021, headline inflation is expected to average higher between 2.5% and 4.0%, primarily due to the cost-push factor of higher global oil prices. In terms of trajectory, headline inflation is projected to temporarily spike in the second quarter of 2021, driven by the lower base from the low domestic retail fuel prices in the corresponding quarter of 2020. Headline inflation in April and May may rise to approximately between 6.5% and 7.0%. However, this will be transitory as headline inflation is expected to return to below 5.0% in June, and continue to moderate thereafter as the base effect dissipates. Underlying inflation, as measured by core inflation, is expected to remain subdued, averaging between 0.5% and 1.5% for the year, amid continued spare capacity in the economy. The outlook, however, is subject to global oil and commodity price developments.
Bank Negara Malaysia
11 May 2021
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