Malaysia's economy into first contraction since global financial crisis

GLOBAL ECONOMY - KUALA LUMPUR. Malaysia's economy plunged into its first contraction since the 2009 global financial crisis in the second quarter as the coronavirus pandemic ravaged business activity, prompting the central bank to sharply cut its GDP forecast for this year.

The central bank said on Friday gross domestic product shrank by 17.1% in April-June from the same period a year earlier - its worst slump in over 20 years and a much deeper contraction than the 10% decline forecast in a Reuters poll.

The downturn comes as the government imposed strict curbs on movement and businesses for most of the second quarter to contain the spread of the coronavirus which has infected more than 9,000 people in the Southeast Asian country.

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It was Malaysia's worst economic slump since the Asian financial crisis in 1998 and marked a sharp decline from the 0.7% year-on-year growth seen in the first quarter. Economies have slumped throughout Southeast Asia due to the coronavirus fallout, with Singapore and Philippines both now in recession.

The central bank cut its GDP forecast for this year, expecting the economy to shrink by between 3.5% and 5.5% in 2020. It previously said the economy could contract as much as 2% this year in the worst case scenario.

The data showed a broad-based fall in economic activity, but there were signs of recovery in June especially in the manufacturing and agriculture sectors.

"The extent of GDP decline has improved quite significantly as the economy began to be reopened in May," said Bank Islam chief economist Mohd Afzanizam Abdul Rashid, predicting a continued recovery.

Bank Negara Malaysia Governor Nor Shamsiah Mohd Yunus expected economic activity to gradually pick up in the second half after the government eased its coroanvirus curbs, helped by a global growth recovery and domestic policy support.

The government has rolled out stimulus packages totalling nearly 270 billion ringgit ($64.39 billion) this year to help the public and businesses weather the pandemic..

The BNM have slashed interest rates by 125 basis points to 1.75% so far this year, with analysts expecting at least one more cut in 2020.

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"I am cautiously optimistic that the worst is behind us," said Nor Shamsiah, forecasting 5.5%-8% growth in 2021.

But Nor Shamsiah said there is room for more targeted policy measures in case of a second outbreak.

"This includes our monetary policy, our liquidity measures and financial measures. Likewise, the government will retain some fiscal space to provide stimulus and support for households and businesses if the need arises," Nor Shamsiah said.