The idea of having a V-shaped economic recovery is that there must exist a sharp decline in the economic production activities in an economy, which is measured by the gross domestic product (GDP) followed by a swift and convincing rebound thereafter.
In the case of the Malaysian economy, the second quarter economic data of 2020 (2Q 2020) is a manifestation of the "V" shape in the making, where the economy seemed to hit the bottom and is now on its way to go up to make the last shape of the "V".
The contraction of the Malaysian economy in the 2Q 2020 by 17.1 per cent, the first contraction since 2009 and the worst since 1998, is highly predicted. The severity of the contraction cannot be compared with other countries as each country has imposed strictness of their lockdowns differently.
And of course, the stricter the lockdown is, the better it is in controlling the spread of the pandemic and the more severe its impact is to the economy, and vice versa. The 2Q 2020 was a period where the Malaysian economy was hardly hit by the implementation of the Movement Control Order (MCO) in an attempt to combat the Covid-19 pandemic.
The Malaysian government has successfully managed to flatten the pandemic curve and even until now, has successfully contained the pandemic with the curve remaining flat. The trade-off appears to be paid off and the opportunity costs are worth taking and seems to be well calculated.
The two worst hit sectors on the demand side are public sector investment and net exports, which shrank 38.7 per cent and 38.6 per cent respectively. Whereas on the supply side, the two worst performing sectors are construction and mining, where even Malaysia's main engine of growth, which is services and manufacturing, also contracted by 16.2 per cent and 18.3 per cent respectively.
It seems that one important indicator which needs more attention moving forward is inflation. The headline inflation already shows that the Malaysia economy was indeed in a deflation. It is still unclear going forward, the deflationary pressures would persist or higher inflation is on the horizon.
A drop of the headline inflation to -2.6 percent (deflation) from 0.9 per cent is a cause for concern as it would disincentive production activities further and deteriorate the prospects of job creation in the near future. Hence, I believe that more reduction in the Overnight Policy Rate (OPR) is needed to stabilise the rate of inflation as this is crucial to revive the economy moving forward.
Fortunately, the light at the end of the tunnel can now be seen. First of all, there is an improvement in the compilation of the quarterly data statistics, whereby the calculation was also comprised a monthly data of the GDP. And based on the monthly data of GDP in the 2Q 2020, the improvement of the production activities can be clearly seen, from April (-28.6 per cent), May (-19.5 per cent), and June (-3.2 per cent).
Several key monthly indicators already shown a "V" type of recovery, such as wholesale and retail trade, Industrial Production Index (IPI), gross exports, electricity generation, Purchasing Manager's Index (PMI), among others. Furthermore, Malaysia's unemployment rate has begun to see a downward trend to 4.9 per cent in June, when it was peak at 5.3 per cent in May.
Without doubt, all this positive economic data is clearly attributed to the various economic stimulus packages launched by the government such as the PRIHATIN, PRIHATIN PKS PLUS, and PENJANA. It is apparent that the worst seems to be over, though we are not out of the woods yet.
But, what if there is a second wave of the pandemic? Even if we can achieve that V-shaped recovery say in 2021, what next? Will we experience a W-shaped recovery where the economy plunge back into a recession? Or will we experience a potential longer-term damage to the economy, also known as "economic scarring" to the structure of the Malaysian economy?
Thus, this is where the medium and long term economic planning comes into the picture. A clear economic vision and direction, and in sync with the short term economic policies launched so far are critically needed at this juncture, not just to realise the V-shaped recovery but eventually getting the economy stronger than ever before.
The writer is Associate Professor and Deputy Director, Economic and Financial Policy Institute, Universiti Utara Malaysia