“The economy will continue to be dragged down by the adverse effects of the Covid-19 pandemic on consumption, exports and investment,” it said.
“Measures to contain the spread of the virus by restricting travel and business activity weigh on household spending.”
However, with restrictions relaxed from mid-June, some recovery is expected in the second half of the year and the release of pent-up demand is already showing in wholesale and retail trade, which picked up strongly in June, it said in its Asian Development Outlook (ADO) 2020 Update released today.
Malaysia’s GDP contracted 8.3% year-on-year in the first half of 2020, a sharp reversal of the 4.7% expansion in the same period of last year.
The economy grew 0.7% in the first quarter of 2020 but fell by 17.1% in the second quarter.
The government announced stimulus packages amounting RM295 billion, including an estimated RM45 billion in additional fiscal expenditure.
Government fiscal stimulus and liquidity support, equal in total to 20% of GDP, is expected to boost domestic demand, but weak labour market conditions under persistent lay-offs and pay cuts will still dampen consumer spending, it said.
It said with the Covid-19 containment measures lasting longer than expected when ADO 2020 was published in April and the global economy plunging into a sharp recession, the update revises down the forecast for GDP growth in 2020 from -4% to -5%.
“A rebound by 6.5% is forecast for 2021,” it added.
In terms of sector, it said growth in agriculture should revive in the near term.
“Palm oil yield and production are expected to recover with better weather,” it said.
However, ADB said mining is expected to continue to struggle under low global oil prices.
It said manufacturing will face headwinds from much weaker demand, both at home and internationally.
On the service sector, ADB said hospitality and retail businesses have been particularly hard hit by the lockdown and people’s general reluctance to go out during the pandemic.
Hotels, restaurants, and transportation services are expected to languish as international travel continues to be highly restricted.
ADB forecast external demand will remain weak as the global economy slows and exports will shrink further as Malaysia’s key markets are affected.