ANNUAL economic growth for 2021 came out as we had expected, at around 3.1%, which is toward the lower end of the Bank Negara Malaysia forecast range of 3% to 4%.
The outcome for the full year in 2021 confirms that there has been, and, we believe still is, too much optimism about the growth prospects for the coming year in 2022.
Our analysis suggests that the low growth numbers last year are due to the structural impact of the lockdowns, which has created a much more complicated situation for businesses and consumers and slowed the transition to normal growth.
On a positive note, the economy recovered well in the fourth quarter (4Q) compared to the previous quarter.
Gross domestic product (GDP) grew by 10.4% on a quarterly basis and 6.6% in seasonally adjusted terms. This is second only to the 21.3% quarterly growth seen in 3Q 2020, which was the biggest rebound in recent years.
Nonetheless, the bumpy pattern tells us that the economy is being pushed by the many government stimulus and other policy measures, such as EPF withdrawals, rather than expanding due to strong underlying growth and an improvement in fundamentals. This is concerning after two years of crisis, and shows that we still do not see the quality of growth that would allow us to be optimistic just yet.
If we look at the two main pillars of economic growth in more detail, we can see some of the causes of our cautious approach.
Private consumption grew by around 5% on a quarterly basis, and fixed investment grew by 5.5% on a quarterly basis. Looking at the composition, we can see that there is quite a worrisome reliance on low-quality, short-term factors.
Behind the lack of consumption
As the economy reopened at the end of the year, we would expect consumption in 4Q to pick up significantly. As people started to go out again after the lockdown phase, many forecasters had expected them to spend more of the pent-up consumption that had been held back during the lockdown.
We felt that we might not see this pent-up consumption, and, although it did happen to some extent, what we actually saw was a sort of zero-sum expenditure effect so that the overall consumption impact was muted for three reasons.
First, as people began to move around more freely, the use of cars and other transportation increased. This caused consumption to increase due to extra transportation spending worth roughly RM10.8 billion. This increase in transportation spending contributed more than the total increase in consumption, RM 10.3 billion. So net of the “transport effect” consumption would have been flat.
Second, as people began to go out more, they made savings on eating and drinking at home worth around RM4.4 billion, but spent RM4.7 billion in restaurants, hotels, recreation and services. So we can see that this overall near-zero sum suggests a shift in consumption rather than a net increase.
Third, we can see that the savings made by many people from the utility bills discount worth around RM1.7 billion has, in some sense, been used as a buffer to spend more money on discretionary items such as clothing and footwear, furnishings, household appliances and communications which together increased by around RM1 billion. Again, this is more of a redistribution than a net increase in consumption.
Private consumption drops 33%
Overall, investment rose 5.5% in 4Q compared to 3Q, which is very important and very good news.
However, the breakdown shows that the aggregate increase comes from an 81% rise, or an extra RM10.4 billion increase in public investment, compared to the previous quarter, but a sharp contraction over the same period of 13% or RM6.8 billion in private investment.
During the lockdowns, private investment has fallen 33% compared to the final quarter of 2019 and has yet to recover.
As we have argued before, we have to consider investment, and, in particular, private investment, as the engine of the economy. If there is not enough aggregate demand and enough profits generated from that demand, then private investment will continue to fall, and this is not compatible with a robust and solid growth phase ahead.
There were some good signs from external demand and the trade balance, which again contributed to overall growth.
Exports rose by 12% on a quarterly basis, consolidating the recovery over the last few quarters and bringing the current account ratio to its highest level in the pandemic crisis period, reaching 8.6% of GDP. This export-led part of the recovery, in turn, will help the recovery in employment and wages.
So, while we see some positive signs pointing toward slow but steady recovery, we still need a new engine to sustain this momentum from new sources of private investment and an increase in disposable income to allow consumers to spend more in net terms, rather than simply switching spending from one place to another.
It is essential for Malaysia to build its new phase of growth on solid domestic investment and robust consumption, rather than relying on external demand and government spending. This will be the challenge for 2022. – The Vibes, February 12, 2022
Professor Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist at Malaysia University of Science and Technology. The views expressed are those of the authors
