PublicInvest predicts another lockdown could shrink GDP by 2.9%

KUALA LUMPUR (May 21): PublicInvest Research said today gross domestic product (GDP) could contract by 2.9% if an eight-week lockdown to curb a resurgence in Covid-19 cases is imposed.

In a report, the research house's economist Dr Rosnani Rasul said a two-week lockdown could shave 0.8% off the GDP, while four weeks could lop 1.4% off economic growth; six weeks of closures could cause a 2.2% contraction.

However, she qualified that this is based on the assumption of 50% output with key sectors allowed to operate as usual and the government does not give out new fiscal aid.

"The impact will be cushioned, however, by the likely allowance of five significant sectors operating normally (manufacturing, services, agriculture, construction and trade) albeit with more stringent Standard Operating Procedures (SOPs) to reduce the risks of transmission of Covid-19. 

"The length of the lockdown could also be shorter amid the need to save the livelihood of affected groups (B40, M40, SMEs). Given increasingly limited fiscal space, we are wary over the government’s ability to provide more direct fiscal aid, which could then see statutory organizations/funds and/or financial institutions bearing the load," she said.

The spectre of a lockdown looms as the swell in Covid-19 cases — with new cases exceeding 6,000 in the past two days — caused by the emergence of new, more infectious variants of the coronavirus from South Africa, the UK, India and Nigeria could prompt more drastic action to flatten the curve of infection, especially in the Klang Valley, she noted.

"Lack of more significant intervention to lower the Covid-19 curve in the Klang Valley could prove to be a medium-term drag on economic recovery, putting further strain on the government’s already stretched fiscal condition," it said.

She pointed out that the Klang Valley is Malaysia's economic engine, contributing about 40% of the country's GDP.

"The significance of the area to the economy is further cemented by the fact that it is home to about 43% of the country’s population (combined KL & Selangor: 13mn ++). Kuala Lumpur is also the most densely populated area in Malaysia (6,891 persons per sq kilometer) followed by Putrajaya (third; 1,478 persons per sq kilometer) with Selangor at fifth (674 persons per sq kilometer) which increases the risk of transmission further," she said, adding that it would be challenging to enforce stricter regulations in these areas given their density and population size. 

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