• Bait Al-Amanah

The Alphabet Soup of Malaysia’s Economic Recovery

By Benedict Weerasena

When I was young, I thoroughly enjoyed a bowl of Alphabet soup. The delight in choosing which letters to eat first thrilled me, much more than the taste of the soup itself. Little did I know that this thrill of choosing letters would mean much more to me now as an Economist, trying to figure out which letters portray our economic recovery today.

In past economic crises and recessions on the international level, there have been several recovery shapes, including the Z-shaped recovery, V-shaped recovery, Nike Swoosh/Check mark-shaped recovery, U-shaped recovery,  W-shaped recovery and finally the L-shaped recovery. The recovery shapes here are from the highest level of optimism to the most pessimistic scenario, as seen below:

Basically, the main 2 scenarios in past recessions are the V-shaped and U-shaped recovery, which are widely discussed by economists worldwide. In a ‘V-shaped’ recovery, the economy quickly and strongly recovers after suffering a sharp economic fall. Spurred by a significant shift in economic activity, this recovery is seen as the best-case scenario after an economic recession. For example in our current pandemic, the economy quickly returns to its pre-pandemic baseline once physical distancing is lifted, and everything is just as it would have been before.

On the other hand, a ‘U-shaped’ recovery occurs when the economy experiences a sharp decline in economic growth and a period of stagnation follows before the economy rises to its previous peak. What this means is that even after the pandemic risks recede in a post Covid-19 world, the economy is unable to return to pre-pandemic levels quickly, though it does get there eventually. In a nutshell, a “U” shaped recession often takes between 12 to 36 months and the recovery takes longer than a “V” shaped recovery.

Looking at the numbers, Malaysia eked out an expansion of 0.7 percent in the first quarter (1Q) of 2020 to surprise most economists and analysts who have expected the local economy to contract. This was followed by a year-on-year contraction of 17.1 percent in 2Q, which was the worst decline since the Asian Financial Crisis. This sharp decline was due to the strict movement restrictions implemented which resulted in capacity constraints affecting growth in the services, manufacturing and construction sectors.

In 3Q 2020, Malaysia’s economic decline slowed to -2.3%, which signalled a turnaround from the worst of the pandemic’s business-crippling effects. What initially looked like a V-shaped recovery however did not materialize in the final quarter of the year, which recorded a lower year-on-year growth rate of -3.4%, as shown below. The key factors for this loss in recovery momentum were due to the tightening of movement restrictions and commodity supply disruptions due to labour shortages and facility closures which more than offset continued growth in external demand, according to Malaysia’s Central Bank.

Image Source: Bank Negara Malaysia

Instead as seen in the blue real year on year GDP growth line above, our economic recovery scenario is starting to look like a ‘Reverse Square Root’ or ‘Reverse Radical’ shape. Theoretically, this recovery shape implies a steep drop followed by a quick partial recovery and a longer period of slower growth. This will likely be our recovery path considering the drop in recovery momentum in Q4 2020 which is likely to persist into the first quarter of the year; due to renewed movement restrictions impeding the revival of economic activity.

In conclusion, this ‘Reverse Square Root’ scenario implies that the recovery from this recession will be bumpier than previous recessions, highlighting the unprecedentedness of the current situation. In these unprecedented times, even my childhood alphabet soup with all the possible alphabets is insufficient to demonstrate the shape of Malaysia’s economic recovery.

*Benedict Weerasena is an Economist at Bait Al Amanah (House of Trust)

#Economics #MalaysianEconomy

0 views0 comments