A second wave of COVID-19 infections in Malaysia has led authorities to re-impose the Conditional Movement Control Order (CMCO) for two weeks from 14 October in Kuala Lumpur, Selangor, Putrajaya and from 13 October in Sabah.
These states accounted for c.46.7% of GDP in 2019; we estimate that the two-week CMCO will subtract c.0.4ppt from 2020 headline GDP growth. We continue to expect 2020 GDP to contract 4.4% as we had previously incorporated only a gradual recovery scenario, but acknowledge downside risks to our forecast.
Assuming that its base case did not incorporate a re-imposition of restrictive measures, the two-week CMCO may reduce the 2020 median GDP forecast to c.-5%, still within the forecast range.
From a monetary policy perspective, the latest statement in September suggested that Bank Negara Malaysia (BNM) was comfortable with a wait-and-see stance. At that time, the COVID-19 situation was contained domestically and latest data signalled a pick-up in economic activity.
The resurgence in COVID-19 infections and latest high-frequency data suggests that the economic recovery momentum is stalling, with only a moderate improvement in the labour market. BNM may be less neutral now and we see a risk of BNM cutting rates again in November.
Nevertheless, we maintain our call for unchanged policy rates. Rates are already at a historical low and further cuts may have only a limited marginal impact (with pandemic restrictions in place) and reduce future policy space.
We also think that a contained resurgence in infections and the pace of economic activity may not slow down as much as in the previous CMCO phase. The key will be the effect on consumer and business sentiment, but this will depend on the developing local infection situation. Further broadening or extension of the CMCO may result in a more pre-emptive decision by the central bank.
Malaysia has seen a resurgence in COVID-19 cases in recent weeks, with the weekly increase surging to 23.5% as of 12 October the highest since April. The government has opted for more localised lockdowns, implementing the CMCO only in states where infection rates are high.
This is not a surprise as re-imposing a nationwide MCO would have a severe impact on the economy. Under the CMCO, economic activity will be allowed as long as Standard Operating Procedures (SOPs) are adhered to.
Schools, day-care centres, parks and recreational venues will, however, be closed and inter-district travel will be prohibited and will require consent. Essentially, the CMCO aims to reduce social interactions with minimal impact on the economy.
Hospitality-related sectors will likely be the hardest hit, with inter-district travel barred, leading to the loss of domestic tourism. Food and beverages services may also be hit hard as dining-in services are disallowed.
Written by Edward Lee, Chief Economist & Jonathan Koh, Economist