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BANK Negara Malaysia’s (BNM) assessment for the Malaysian economy in the coming year shows the difficulties of forecasting during a period of significant disruption in economic activity.
On one hand they are correct in highlighting the balance of risks is on the downside but on the other they have a very buoyant outlook for economic growth during what is likely to be a very turbulent year.
Given that Malaysia has been in lockdown for the first three months of 2021, BNM’s forecast that the economy will grow by 6.0-7.5% for the full year looks optimistic and may be due solely to comparing this year with the low base of last year. A more realistic view of underlying growth in 2021 would be around 3%, which does not indicate such a strong rebound.
In fact, BNM’s analysis of growth potential is tucked away in the back of their report and is consistent with our view that this crisis would leave us with a completely different economy. We calculated that underlying growth could be about 0.75% lower while BNM estimates 1.3%-1.5%. This is a significant structural break.
We should remember that this time last year BNM forecast the economy could actually grow by 0.5% during 2020 or at worst suffer a mild 2.0% contraction which shows how difficult it is to forecast during a structural break like the one we are experiencing.
BNM’s predictions are in line with the 6.0% growth forecast by the World Bank last week but in April last year the World Bank forecast was also far off. They predicted only a mild 0.1% contraction, revised down to -3.1% in June and -4.9% in September.
These all proved to be off-target. The economy contracted by 5.6% and would have contracted by 9.6% according to the Finance Ministry if not for the stimulus packages.
This outcome was more in line with our assessment in June of a more than 7% contraction without a significant policy injection. This year we expect the economy to grow between 3-4% with low inflation around 1%. Moody’s Analytics are also forecasting in that range and, like us, they expect Malaysia to reach pre-Covid gross domestic product by mid-2022.
BNM’s analysis of inflation looks much more realistic and they have been very clear about the factors likely to affect prices and therefore the monetary policy stance in the coming months. This is exactly what a central bank should do. Price stability is a central component of a successful economy that also protects society from rising costs of living.
It is likely that core inflation will remain low around 1% and within the BNM range 0.5-1.5%. Non-oil inflation will be flat around zero. This low inflationary scenario continues the trend of the last five years and is in line with our assessment that at the tipping point mid-year, the economy will remain in a low inflation zone.
Headline inflation may be affected by oil prices but we already saw the biggest impact of this cost-push during the last three months. Headline inflation will show only a temporary blip and should not be used to guide interest rate policy as BNM correctly notes.