This article first appeared in The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

AFTER a torrid 2020 — described as a once in a lifetime pandemic — many hoped this year would be much better. Official forecasts were set at optimistic levels, the Ministry of Finance (MoF) projecting that the economy would rebound 6.5% to 7.5% this year during the presentation of the Economic Outlook 2021 Report.

Some had said the forecast was too optimistic, while others maintained it was reasonable, given 2020’s 5.4% economic contraction and low base effect, plus a projected rebound in global growth and international trade.

Unfortunately, the pessimists were right.

Many Malaysians, especially those in the wealth-generating states and territories — Selangor, the Federal Territories, Johor and Penang — found themselves spending as much time at home, if not more, as in 2020, due to the various lockdowns throughout the year.

In hindsight, signs that the economic recovery would be slow were evident as Covid-19 infections crept up significantly towards the end of 2020. On Jan 13, Penang, Selangor, Melaka, Sabah and the Federal Territories were put under a movement control order (MCO), or MCO 2.0, as infection rates spiked.

By Jan 16, Covid-19 infections totalled 4,029, exceeding 4,000 new cases in a day for the first time. A few days later on Jan 19, the MCO 2.0 was extended to include the other states, except for Sarawak, a situation that dragged on until Feb 18, when certain states moved into the less stringent Conditional (C)MCO and Recovery (R)MCO.

However, Selangor, Kuala Lumpur, Johor and Penang, which contribute a significant portion of gross domestic product (GDP) were kept under MCO 2.0 as infection rates were still high.

On Jan 18, Putrajaya announced a RM15 billion Permai stimulus package.

As the nation fought to contain infection rates, the National Covid-19 Immunisation Programme was rolled out on Feb 24, with the first recipient being then prime minister Tan Sri Muhyiddin Yassin.

On March 5, the four states transitioned into CMCO while other states transitioned into more lenient restrictions under RMCO.

About two weeks later, Muhyiddin unveiled a RM20 billion Pemerkasa stimulus plan and said the government would not impose a blanket MCO across the country anymore.

However, he would be forced to renege on his promise a few months later when a nationwide MCO — dubbed MCO 3.0 — that commenced on May 12 was enforced as infection rates remained elevated.

Up till that point, the official economic forecast had not changed as the governing bodies were still convinced a turnaround was imminent. Compared with the first nationwide MCO implemented in March 2020, most economic activities were allowed under MCO 3.0 but subject to specific standard operating procedures.

The government had also continued to support citizens and businesses with stimulus packages, unveiling the RM40 billion Pemerkasa+ on May 31.

As 1Q2021 GDP numbers came in better than expected, Bank Negara Malaysia governor Datuk Nor Shamsiah Mohd Yunus soothed concerns over an economic derailment.

She assured that GDP growth was on track to hit Bank Negara’s 6% to 7.5% forecast, noting that MCO 3.0 would “be less severe” than the first MCO.

On a year-on-year (y-o-y) basis, the economy contracted by a smaller 0.5% in 1Q2021, compared with the 3.4% contraction in 4Q2020. Economists had forecast a 0.9% y-o-y contraction in the first quarter.

As infection rates continued to scale new highs, on June 1, the nation was put under a “full movement control order” similar to MCO 1.0 in 2020.

Economic activity was limited to “essential” sectors for 14 days, and subsequently extended till the end of June.

Despite the strict MCO in June, 2Q2021 GDP rebounded 16.1% y-o-y from a sharp 17.1% contraction a year ago. But on a quarterly basis, GDP shrank 2% because of the tight containment measures.

In mid-June, the government announced a National Recovery Plan (NRP), a four-phase exit strategy from the Covid-19 crisis. Apart from new infections, intensive care unit utilisation and vaccination rates were also to be taken into consideration.

Although the vaccination effort had started off at a snail’s pace because of the lack of vaccine supply, it accelerated from June when supplies became available.

As at Dec 19, some 78.2% of the total population have been fully vaccinated and is projected to reach 80% by June 23, 2022. Starting next year, children under the age of 12 will be vaccinated.

It is interesting to note that even though the vaccination rates were rising, so were the daily infection rates. On Aug 26, a record of 24,599 daily cases was reached, further inundating already stretched hospitals.

But by the start of October, the accelerated immunisation programme began to bear fruit as all states were allowed to move out of Phase 1 of the NRP.

But the damage to the economy was done. Because of the strict containment measures under Phase 1 of the NRP in July, which affected consumption and investment activities, the economy contracted 4.5% y-o-y in the third quarter of 2021.

In August, the MoF revised its earlier growth projection to 3% to 4%.

While the virus was raging in 2021, inflation was climbing as well, due to a combination of factors such as supply chain disruptions, soaring commodity prices, the global energy crunch and labour shortages as a result of the pandemic.

Some quarters worry that amid rising prices and slow economic growth, coupled with relatively high unemployment, Malaysia could face stagflation.

Nonetheless, Bank Negara governor Nor Shamsiah emphasised in November that the country is not facing stagflation and assured growth would accelerate to between 5.5% and 6.5% in 2022 on the back of improving external demand conditions and the easing of containment measures amid high vaccination rates.

The central bank isn’t too concerned about runaway inflation either — as seen in the US due to a combination of strong demand and supply constraints — noting that “there is still room for improvement in both growth and employment before demand-driven price pressures become a concern”.

If we look around us today, life seems to have returned to normal for many, with the additional accessory of a face mask. People are spending less time at home and more time in offices, malls and other recreational places as interstate travel resumed since Oct 11. These trends are also reflected in the Google Mobility data (see chart). All this points to sentiment that is turning positive.

Whether the MoF and Bank Negara’s projected growth of 5.5% to 6.5% in 2022 is too optimistic remains to be seen.

Based on projections by private economists, the forecast seems realistic. However, the lingering risks of new Covid-19 variants cannot be discounted as Omicron, the latest variant, demonstrates. An uncontrolled outbreak could impede a global and domestic recovery.

Will the optimists prove the pessimists wrong this time?

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