ECON model: some segments of the economy still need help to recover


Recent data indicates that Malaysia is showing a healthy economic recovery. Gross Domestic Product (GDP) grew 5% in 1Q2022 and is expected to further accelerate in 2Q2022. This is supported by Bank Negara Malaysia’s decision to begin interest rate normalization, a sign of confidence in the recovery.

Yet we continue to see a flurry of negative news about the difficulties faced by small and medium-sized enterprises (SMEs) and households. Some have rallied for more withdrawals from the Employees Provident Fund and greater disbursement of government support policies. Opposition to the last two hikes in key overnight rates has also been particularly strong.

This got me thinking: why is there this dichotomy between data and feelings?

Are the economic data wrong? Absolutely not. What drives these feelings then?

Although there is a saying that bad news sells better, there is also a natural human tendency to give negative experiences more weight than positive or neutral experiences. As such, we are more drawn to negative news and see it dominate the headlines more frequently.

However, the issues raised are not entirely unjustified.

One of the reasons for this dichotomy is the disproportionately lower transfer of wealth and income to wage earners resulting from the economic recovery. The share of GDP earned by labor fell to a low of 34.8% in 2021, from the pre-pandemic level of 35.9% in 2019 (see Chart 1). Much of the 9% growth in nominal GDP last year was largely hoarded by capital owners, as indicated by the 14% increase in gross operating surplus. At the same time, compensation of employees increased by only 2.2% (see graph 2). Simply put, employees are unfortunately not the main beneficiaries of the economic recovery at the moment.

For consumers and households, rising inflation further erodes the gains of economic recovery and the labor market. Many consumers judge their financial well-being by their daily expenses. Thus, the sharp rise in the prices of goods and services, especially food, will directly affect budgets. With food accounting for about 30% of total spending for a typical household — and even more so for B40 households, which make up 40% of the population — consumers will have no choice but to tighten their belts. Such struggles seem incompatible with a strong economy, regardless of the overall growth figures.

For companies, not all companies show the same level of recovery. So far, Malaysia’s GDP has been mainly driven by the manufacturing sector (especially electrical and electronics). Meanwhile, high commodity prices are benefiting incumbents in these sectors. Moreover, overall growth was mainly driven by large companies. The GDP contribution of micro, small and medium-sized enterprises (MSMEs) grew by only 1% in 2021, underperforming overall GDP growth by 3.1% and that of large enterprises by 4.4% l last year (see graph 3). Given that MSMEs account for nearly 50% of overall national employment, the lagging economic recovery is also a cause of the dichotomy.

In this regard, it is useful to continue targeted support programs for low-income segments of society and MSMEs. This will help prevent any further worsening of income inequality in Malaysia.

On a more positive note, macroeconomic data showed that the overall economy is in much better shape now than it has been for the past two years, and it is poised to chart an expansionary pace. relatively strong in 2022 and beyond. Both households and businesses will benefit from the spin-offs of sustained economic growth, however uneven.


Woon Khai Jhek is Senior Economist and Co-Head of Economic Research at RAM Rating Services Bhd

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