BNM will likely look past the potential weakness in economic activity in 1H21 and focus on a 2H21 recovery of growth and as such, it will not likely undertake an “insurance type cut”, analysts observed. — AFP photo
KUCHING: Bank Negara Malaysia (BNM) will likely look past the potential weakness in economic activity in the first half of 2021 (1H21) and focus on a 2H21 recovery of growth and as such, it will not likely undertake an “insurance type cut”, analysts observed.
Heading into the March 4, 2021 BNM monetary policy committee (mpc) meeting, RHB Investment Bank Bhd (RHB Investment) had expected the central bank to cut the overnight policy rate (OPR) by 25 basis points (bps) to 1.5 per cent as “insurance” against a challenging 1H21 outlook for the economy, similar to the 25 bps seven-day reverse repo rate cut by the Bank Indonesia on February 18.
“We were erroneous in making this assumption and now believe the BNM will remain on hold for the remainder of 2021,” the research firm said.
“The central bank is looking past the 1H21 weakness in growth and is focusing on the 2H21 recovery path on back of improvements in global growth conditions, in our view.”
Meanwhile, RHB Investment continued to believe that weak consumer spending will persist in 1H21.
The research firm expected the first quarter of 2021 (1Q21) real private consumption gross domestic product (GDP) growth to contract by 1.7 per cent and 2.1 per cent in 1Q21 and 2Q21, respectively, versus -3 per cent in 4Q20 on a per cent quarter on quarter (q-o-q) basis.
In addition, the research firm maintained its view that headline GDP growth will contract by 6.2 per cent in 1Q21 and realise only a modest bounce to 0.5 per cent in 2Q21 on a per cent q-o-q basis.
“We expect consumer spending to remain quite weak in 1H21 as high unemployment and weak wage growth will persist in 1H21. Consumer spending is unlikely to return to the pre-pandemic level in 2021 and similarly for headline GDP.
“With the easing of the second Movement Control Order (MCO2.0) restrictions recently and modest adherent to the government’s standard operating procedures (SOP), the risks still remain that another round of restrictive mobility related measures could ensue.”
RHB Investment maintained its forecast that the unemployment rate will average 4.8 per cent 1H21 as businesses continue to restructure before coming down to 4.4 per cent year on year (y-o-y) in 2H21, which is still higher than the pre-pandemic level of 3.3 per cent. The i-Sinar withdrawal program is positive for consumers, but will have limited impact in the research firm’s view.
“On the supply side of the economy, banks remain cautious in lending especially towards the construction, property, and small and medium enterprise (SME) sectors which makes returning to normal economic activity difficult.
“Additionally, the record low core inflation prints suggest that domestic demand conditions via slack in the economy will likely persist in 1H21.”
RHB Investment highlighted that on the external front, even though the research firm is positive on the outlook for US growth, the timing of the impact on Malaysia’s economy is unclear.
“In addition, the outlook for 1H21 growth in Europe and China is unclear.”
In the research firm’s view, the balance of risks is skewed towards a synchronised recovery in growth across major geographies being more of a 2H21 event risk rather than a 1H21 reality.
“We revised up our 2021 US dollar GDP growth forecast to 4.5 per cent y-o-y from 2.5 per cent on March 3, 2021.
“While we believe that robust US growth will have a positive impact on the trajectory of Malaysia’s GDP growth, as it has in the past, the timing of the impact is unclear.
“Malaysia’s exports lag the US business cycle by around one to two quarters.”
Additionally, RHB Investment noticed that challenges to the European growth outlook remain with the Purchasing Managers’ Index’s (PMI) remaining soft, while high frequency satellite data for China indicate a recent weakening of manufacturing sector activity.
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