KUALA LUMPUR: Malaysia's gross domestic product (GDP) is projected to shrink 4.9 per cent this year, according to the World Bank.
This is down from yhe bank's early estimation of a 3.1 per cent contraction, following a sharper than expected contraction in the second quarter (Q2) of 2020.
In its report titled: "World Bank East Asia and Pacific Economic Update, October 2020: From Containment to Recovery", the international financial institution said the change in the forecast reflected the heightened uncertainty surrounding the start and speed of the global recovery, which would weigh on investment decisions and external demand.
The forecast was also made due to risks to the outlook firmly tilted to the downside with the possibility of a more protracted than expected global recovery could continue to hamper investment decisions and further suppress external demand.
"There is a risk of stricter containment measures nationwide, as illustrated by recent resumption of movement control order (MCO) in some states.
Prolonged restrictions on international travel would weigh on the tourism sector. Lingering political uncertainty, including the possibility of a near term general election, will continue to weigh on private investment sentiment and could stall the progress of the recovery effort," the World Bank said.
It said government expenditure was expected to increase mainly due to stimulus spending as Malaysia was entering the outbreak with limited fiscal space due to a persistent decline in government revenue since 2012 and increased expenditure rigidity.
"This constrained the magnitude and quality of the fiscal response to the outbreak. Instead, the government relied more on monetary and financial sector forbearance."
The World Bank said the number of vulnerable households was likely to increase owing to higher unemployment and uncertainty over the outcome of the pandemic.
"These households will require continued financial support during the recovery. An enhanced social protection system is needed to provide more robust and sustainable protection beyond one-off crisis relief measures."
The World Bank said reliance on deferment or early withdrawal of retirement savings was limited given most vulnerable Malaysians' underfunding of retirement.
World Bank East Asia and the Pacific chief economist Aaditya Mattoo said the region had been successful in containing the disease and providing relief, but it would likely struggle to recover and grow.
"The priorities now should be safe schooling to preserve human capital; widening narrow tax bases to avoid cuts in public investment; and reform of protected service sectors to take advantage of emerging digital opportunities," he said.
The local economy is severely affected by the pandemic with a double-digit contraction of 17.1 per cent in Q2.
This was driven primarily by a decline in domestic demand due to the imposition of the MCO to stem the spread of Covid-19, as well as weak external conditions.
Private consumption had also declined sharply due to lower household income, movement restrictions and subdued consumer and business sentiment.
The World Bank said heightened uncertainty affected business sentiment and resulted in a large decline in private investment.
Following the economy wide temporary closures and reduced business operations, the labour market was also significantly impacted, with unemployment rising to 5.1 per cent in Q2, its highest rate in thirty years.
"Labour force participation declined from 68.8 per cent in Q1 to 68.1 per cent in Q2 and many workers faced reduced hours and pay. Unofficial government statistics indicate that nearly half of the self-employed were put out of work."
It said the elevated unemployment rate and other weaknesses in the labour market would continue to weigh on private consumption, citing that most demand components including net exports, private consumption and private investment were likely to contract this year.
The World Bank said inflation had been negative since March, consistent with the contraction in output, while the current account surplus narrowed, compared to a year ago, from 3.9 per cent in Q2 2019 to 2.5 per cent of GDP in Q2 2020.
"This was due to a smaller goods balance and a larger services deficit following the disruption in international travel activities.
"Gross exports declined, weighed by declines in manufacturing and commodity exports while imports contracted due to lower intermediate and consumption imports," it added.