By Rozanna Latiff and A. Ananthalakshmi
KUALA LUMPUR (Reuters) -Malaysia's economy shrank 4.5% in the third quarter, contracting by more than expected after its rebound in the second quarter, but the central bank expects a quick recovery as coronavirus restrictions are eased and economic activities resume.
The third quarter performance was markedly worse than the median forecast for a 1.3% year-on-year contraction from a Reuters poll of economists.
But Bank Negara Malaysia (BNM) said recent indicators suggested a more positive momentum going forward.
A pickup in production and construction activities, an improved labour market, and strong external demand would all support a recovery, the central bank said, projecting economic growth between 5.5%-6.5% in 2022.
"The growth outlook remains subject to COVID-19 risk factors globally and domestically, stability in global financial markets and gradual easing of supply chain disruptions," BNM Governor Nor Shamsiah Mohd Yunus cautioned during a news conference.
Malaysia is also set to benefit from strong growth among its major trading partners such as China and the United States, higher commodity prices, and robust demand for semiconductors to cater for remote work equipment and business digitalisation, she said.
A surge in COVID-19 cases and the reimposition of movement curbs have weighed on consumption and investment activity, with the central bank cutting https://www.reuters.com/business/finance/malaysia-cbank-slashes-2021-growth-outlook-covid-19-surge-lockdowns-2021-08-13 the country's growth outlook for 2021 to 3%-4% in August.
Coronavirus infection rates, however, have slowed drastically in recent weeks amid a ramped-up vaccination programme, boosting hopes of a turnaround. More than three-quarters of Malaysia's 32 million population are fully vaccinated.
The Southeast Asian country will likely see a strong rebound in the fourth quarter, with a resumption in international travel expected to boost recovery, Capital Economics analyst Alex Holmes said in a note.
Malaysia this week announced quarantine-free travel lanes with neighbouring Singapore and Indonesia, and expects to reopen https://www.reuters.com/world/asia-pacific/malaysia-reopen-international-visitors-by-jan-1-govt-council-2021-11-11 its borders further by Jan. 1 at the latest.
'NO STAGFLATION'
Since last year, the government has rolled out 530 billion ringgit ($127.66 billion) in stimulus packages, while BNM has slashed its policy rate by 125 points to help the economy withstand the fallout of the pandemic.
BNM said its monetary policy stance would continue to be determined by new data and information, and that it was "mindful of a premature withdrawal of policy support."
Nor Shamsiah stressed that Malaysia was not facing any stagflation and that price pressures will remain moderate in 2022.
Headline inflation is expected to average between 2%-3% this year, with core inflation remaining subdued amid spare capacity in the economy and slack in the labour market.
The central bank is not expected to hike its overnight policy rate until the third quarter of next year at the earliest, according to economists polled by Reuters.
($1 = 4.1515 ringgit)