Despite the deep second quarter GDP contraction for Malaysia, monthly data suggests the economic situation is sitting somewhere between “becoming less bad” and improving. The new monthly GDP (April, May and June 2020) estimates shared by the Department of Statistics suggest the recesssion is becoming less bad from year-on-year perspective (it is impossible to independently verify the Department’s assessment because the monthly series is not available publicly). Industrial data suggests production is returning to pre-crisis level. Unemployment rate is coming off its peak but it is important to state that there is still a long way to go toward pre-crisis average.
The improvement has led to the narrative that we are recovering fast.
But as mentioned before, there are two types of shock at play in this recesssion: supply shock and demand shock. So when we talk of recovery, I think it is important to note that we need to complete two recoveries before we can confidently claim we have come out of the overall economic crisis.
At the moment, we can safely say we are recovering from the supply-side crisis. Some damage has done to the economy from the supply perspective but if things continue to proceed as it is, the overall industrial production would return to its pre-crisis level in the coming months. Somewhat full recovery from the supply-side would likely be possible once the partial domestick lockdown is removed, with the borders opened. The earliest that would happen is likely January 1 2021. Full recovery will depend on our major trading partners aboard, some of which are not doing too well.
In contrast, I think it is much more difficult to say whether we are recovering from the demand-shock, with some statistics possibly becoming unrealiable (a question of quality versus quantity, like the one besetting the unemployment rate calculation). This is where we should turn our attention to now.
To graphically represent that I am thinking about the two shocks, I have produced a chart.
The solid blue region represents the GDP (output), with Point 100 indicating the maximum production under normal times for convenience’s sake. There are 11 time periods from 0 to 10. Period 0 is pre-crisis. For each time period, output depends on two shocks: supply (pink) and demand (yellow).
From the chart at time Period 1, I am showing the GDP contracting due to a massive sudden supply shock. But beginning Period 2, the supply shock begins to be removed from the equation and as a result, the GDP is improving rapidly (for Malaysia, that comes in the form of successfully addressing the Covid-19 infection and lifting the full lockdown). But the supply shock simultaneously generates a demand shock. But the latter shock is more persistent than the supply shock, lasting longer in the following time periods. Our supply shock has a mechanical feeling to it. You know what is going on and if the supply shock gets removed, things would rapid go back to normal. But the demand transmission is more complex and this lies the danger of believing in a V-shape recovery.
One point I want to highlight: while the supply-driven GDP contraction is much, much bigger than the demand-linked contraction, under normal times, such demand-contraction would be considered as serious (with the superlarge numbers we have seen during the Covid-19 crisis, it is easy to lose track of “normal” perspective).
The next critical points for demand-side will be end of moratorium on September 30, and December 31 when the wage subsidy program will expire. I think these two measures have prevented the supply-shock from fully being translated into a demand-shock. The end of the two measures would remove the barriers. Those dates would likely negatively affect income level and unemployment, which would translate to spending.
So, as a summary: the so-called rapid recovery is largely due to the supply shock removal (both successfully addresssing Covid-19 infection and lifting the full lockdown). And it is unclear yet to me if we have begun to undo the demand shock. At the very best, we have only partially delayed it.