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Malaysia enters recession in Q2; central bank downgrades GDP outlook

The Malaysian economy fell into recession as the Southeast Asian country's GDP plunged 16.5% quarter over quarter in the three months to June amid the coronavirus pandemic.

The slump in seasonally adjusted real GDP follows a 2.0% decline in the prior three-month period, according to the Bank Negara Malaysia, which downgraded its economic outlook for the year.

A technical recession is defined as two straight quarters of negative GDP growth.

Worst slump since 1998

On a year-over-year basis, the Malaysian economy contracted 17.1% in the second quarter, marking the first GDP decline since the 2009 global financial crisis, according to the central bank.

The second-quarter annual plunge, which was the deepest since the 1998 Asian financial crisis, came after 0.7% growth in the first quarter.

The central bank said the economy faced supply and demand shocks from weak external demand conditions and measures to contain the spread of the coronavirus in the second quarter.

The Bank Negara Malaysia now expects the economy to shrink between 3.5% and 5.5% in 2020, compared with its previous growth range of 0.5% to negative 2.0%. The economy is projected to rebound with growth between 5.5% and 8.0% in 2021.

On an annual basis, services declined 16.2% in the second quarter, while manufacturing contracted 18.3%. The mining and construction sectors plunged 20.0% and 44.5%, respectively, while the agriculture sector rose 1.0%.

Further easing ahead

The central bank has reduced its interest rates by 125 basis points to 1.75% in 2020 to counter the economic impact of the pandemic, with the governor suggesting there is policy space for more measures.

"Should there be a second outbreak, there is room for targeted policy measures to complement the ones implemented earlier," Governor Nor Shamsiah Mohd Yunus said Friday, as reported by Bloomberg News. "For example, the bank's policy levers can be expanded or extended within this mandate."

The latest data supports expectations that the central bank will further reduce the policy rate by 25 basis points to a new record low of 1.5% in September, Sian Fenner, lead economist at Oxford Economics, wrote in a note.

Headline inflation came in at negative 2.6% in the second quarter amid lower fuel prices and the implementation of an electricity tariff rebate. Inflationary pressures are expected to remain muted in 2020.

The FTSE Bursa Malaysia KLCI Index declined 0.8% at market close.