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Malaysia’s retail recovery threatened by rising inflation

Inflation has been rising in many countries amidst supply-chain challenges.

Malaysia’s retail sector is showing signs of recovery, but a high inflation rate poses a risk to consumer confidence in the country, which will impact retail sales, according to a report from Fitch Solutions.

Retail sales in Malaysia have been weak over 2021 due to the pandemic and its resultant restrictions, with growth mainly coming from a low base. Over the first nine months of 2021, retail sales grew 4.3%, but this is overstated by the low base effect created over the same period in 2020 after retail sales contracted by 5.3%.

“This high frequency data suggests that retail sales in Malaysia have still not recovered to pre-COVID-19 levels. Comparing retail sales in 2021 to that of 2019 (for the period January to September), sales remain 1.2%,” the report stated.

Fitch noted that inflationary pressures have been rising in many countries globally since the start of 2021, as base effects, higher commodity prices and supply-chain challenges create localised shortages, making it a key risk to consumer spending over 2022.

In Malaysia, inflation has been ticking upwards, going from -0.25% YoY in January 2021 to 3.3% y-o-y in November 2021.

“We believe this rate will remain elevated over 2022, forecast to end the year at 3.0% y-o-y. Our Country Risk team does foresee the Bank Negara Malaysia hiking rates over 2022, to 2.25% by the end of the year,” Fitch said.

The report also noted that Malaysian authorities have continued to implement stringent restrictions over 2021, largely in sync with rising COVID-19 cases. Thus, higher vaccination rates are needed for these two to be decoupled and allow for a broader recovery in retail sales from 2022 onwards, the report stated.

“We note further downside risks to our forecast given the high level of political risk since the beginning of H221 and the risk that the COVID-19 outbreak could worsen over the coming months, which could further affect both retail sales and consumer confidence,” Fitch added.

Consumer spending in Malaysia is expected to grow well over 2022, with real household spending to climb 5.1% YoY, a notable improvement from the 0.5% growth estimated for 2021.

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