Malaysia’s economy expanded more quickly than expected on an annual basis in the second quarter, but the central bank slashed its 2021 growth forecast as rising COVID-19 cases and new lockdown measures weighed on the outlook.

Gross domestic product rose 16.1% from a COVID-induced slump a year ago, helped by an improvement in domestic demand and robust exports, and beating expectations for 14.3% growth in a Reuters poll of economists.

The economy bounced back from its worst contraction in over two decades in the second-quarter of 2020.

But gross domestic product shrank on a quarterly basis while the central bank cut its full-year growth forecast to 3.0%-4.0% from 6-7.5% previously.

Malaysia has seen a resurgence of COVID-19 infections due to the Delta variant of the coronavirus, reporting record-high cases and deaths in recent days, and has grappled with some form of lockdown since May. read more

But the central bank is optimistic that the country’s vaccination drive will allow for a gradual reopening of the economy and a rebound in the second half of the year.

“Malaysia’s growth recovery is expected to broadly resume in the later part of the second half of 2021 and improve going into 2022,” Bank Negara Malaysia Governor Nor Shamsiah Mohd Yunus said in a statement.

Capital Economics economist Alex Holmes said that while Malaysia’s immediate outlook has deteriorated, its ramped up inoculation program should offer some hope.

About 50% of the total population has received at least one dose of the COVID-19 vaccine.

“While we expect weakness to continue this quarter, we have a strong bounce back pencilled in for Q4 and are sticking with our full-year GDP growth estimate of 5%,” Holmes said in a research note.

On a quarterly basis, the economy shrank 2% in the second quarter of 2021, after growing 2.7% in the first three months of the year.

ACCOMMODATIVE MONETARY POLICY

While the central bank expected GDP to return to pre-pandemic levels by the fourth quarter on a seasonally adjusted quarterly basis, Governor Nor Shamsiah said the bank’s monetary policy will remain accommodative and that it has the policy space to respond further if necessary.

The central bank cut its policy rate by 125 basis points in 2020 to help the economy withstand the fallout of the pandemic while the government has also rolled out over 340 billion ringgit ($80.28 billion) in stimulus and aid measures since last year.

OCBC economist Wellian Wiranto said the “severe slashing” of the 2021 outlook may be a prelude to an interest rate cut next month.

“Even as it pointed out a gradual recovery to come in Q4 and growth acceleration into next year, the bodily blows that the economy is suffering through now, as reflected in the new downbeat forecast, necessitates a response in the form of easing,” he said.

The central bank also said it will ensure that financial markets remain orderly, in response to a question about political instability in the country.

Prime Minister Muhyiddin Yassin has faced infighting in his governing coalition for months. The premier last week rejected fresh calls to quit and said he will face a confidence vote in parliament next month to test his majority. read more

“Political stability will certainly provide policy certainty,” said Nor Shamsiah.