KUALA LUMPUR, Feb 11 — 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 forecast range of 3-4%.
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 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 a quite worrisome reliance on low-quality, short-term factors.
As the economy reopened at the end of the year we would expect consumption in the fourth quarter 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 round RM1 billion. Again this is more of a redistribution than a net increase in consumption.
Overall investment rose 5.5% in Q4 compared to Q3 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 9.4% 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 the 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 one place to another.
It is essential for Malaysia to build the 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.
*Professor Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist at Malaysia University of Science and Technology.
* This is the personal opinion of the writers and does not necessarily represent the views of Malay Mail.
