Domestic demand expected to remain weak for some time post-MCO

PETALING JAYA: Domestic demand is expected to be weak for some time due to travel aversion and social distancing, even after the movement control order (MCO) is llfted, which will likely intensify the adverse chain reaction that will fuel the collapse of micro businesses, in particular, younger and smaller businesses.

In a research note, AmBank Research pointed out not every small business is equipped to survive this downturn and because small businesses contribute disproportionately to job loss during recessions, policy responses are necessary.

“In our current crisis, these measures must occur immediately — which means that speed and simplicity are important considerations. If speed and simplicity are required in the short term, then ‘scale’ is the operative word for the medium-term recovery,” it said.

AmBank Research said this Covid-19 crisis will demand a set of policy support measures that are both broader and longer term than those pursued in 2009. Otherwise, small businesses are certain to face a calamity.

“Thus, measures should look into post coronavirus rebuilding of the economy. There must be a single government-backed public-private partnership agency tasked to rebuild the SME economy.”

It said looking back at what happened to SMEs during the 2008 global financial crisis and the 1997 Asian financial crisis may offer some clues on how small businesses experienced economic contractions compared to larger businesses, although the coronavirus impact will likely differ in severity and duration from the past two crises.

AmBank Research has reduced Malaysia’s 2020 growth to 0.4% with the downside at -2%, from 3% previously. Additionally, it is projecting a growth of 1.9% for SMEs this year, with the downside at -0.5%.

This downgrade in the country’s gross domestic product (GDP) growth is expected to reduce the SMEs’ average per day revenue to RM30 million based on the projected 1.9% SME growth, from RM90 million previously at 6% growth.

“Many SME businesses have been forced to close their doors, and some may not reopen. Apart from revenue loss, they will be impacted by poor credit standings.”

Generally, the older and larger small businesses are more likely to withstand an economic crisis.

“Exports will stay weak from lockdowns. Commodity prices will be soft. Bankruptcies and bad loans are concerning factors. Job losses are also a concern although these are expected to vary considerably according to the age and size of the small businesses,” it added.

Meanwhile, Affin Hwang Capital said going into the second half of the year, private consumption growth will not be normalised immediately as households will likely be impacted from possible shocks to their incomes and a slight erosion of purchasing power.

“Households are also likely to be cautious on their spending due to the uncertain employment situation as well as affected by the expected slower growth in real disposable income.

“If Covid-19 prolongs, the possible shocks to household income and employment will weigh on consumer sentiment further, translating into weak consumer spending,” it said.

Bank Negara Malaysia (BNM) had said that growth in domestic demand is expected to be slower by 1.1% year-on-year in 2020 from 4.3% in 2019, weighed down by weak labour market conditions, the MCO and well as weak sentiment.

However, the central bank also said it anticipates the measures introduced in the economic stimulus packages worth RM250 billion, to support households in increasing their disposable income and cash flow.

On the other hand, private investment is expected to decline by 9.7% in 2020, due to weaker business sentiment.

“Private investment is highly correlated with external conditions, and as foreign investors are faced with similar challenges from Covid-19 outbreaks in their home countries, there are risks of delay or postponement in actual implementation from investment in the manufacturing and services sectors.

“Similar to domestic investors, we believe that foreign investor confidence will not be restored in the short to medium term due to weak global economic prospects,” Affin Hwang noted.

source https://www.thesundaily.my/business/domestic-demand-expected-to-remain-weak-for-some-time-post-mco-DA2222371