The bad news is, there is a “very high possibility” for the United States to suffer a downturn in 2023, according to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie. Lee said the main uncertainties about a US recession is its timing and severity.
PETALING JAYA: There is a “30% to 40%” chance for Malaysia to face a recession next year, and this largely depends on whether the United States – Malaysia’s third-largest export destination – manages to avert an economic meltdown.
The bad news is, there is a “very high possibility” for the United States to suffer a downturn in 2023, according to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.
Lee said the main uncertainties about a US recession is its timing and severity.
“A recession could also be happening in the European Union, but this depends on how the Russia-Ukraine crisis will play out,” he said during SERC’s quarterly economy tracker briefing yesterday.
For the time being, however, SERC has maintained its 2023 economic growth forecast for Malaysia at 4.1%. It has also not factored in the risk of recession in its forecast.
As for 2022, SERC predicted a growth of 5.2%. After a 5% expansion in the first quarter, Lee expects the Malaysian economy to grow further by 6% to 6.5% in the second quarter of 2022.
The stronger projected growth is on the back of the reopening of the economy and the Hari Raya festive celebration spending effect.
In addition, a higher growth is also possible thanks to the Employees Provident Fund’s (EPF) fourth withdrawal amounting to at least RM40.1bil, of which 40% of the amount will be for the purpose of supplementing daily or monthly essential expenditure.
However, the economic momentum is likely to decelerate in the second half of the year amid rising inflation, weakening global growth and synchronised global monetary tightening.
Lee said the country’s real gross domestic product (GDP) is likely to grow by 4.5% to 5% in the July-December 2022 period, as compared to 5% to 6.5% in the first half.
He pointed out that Malaysia’s growth in the second half would also be restrained by cautious domestic demand, moderate exports and the dissipating consumer spending stimulus.
On inflation, Lee opined that Malaysia’s headline inflation would increase by 3% to 3.5% in 2022, but highlighted that the country’s inflation remains contained compared to other neighbouring countries.
This is because of the various measures implemented by the government such as subsidies and price ceiling on cooking oil, fuel, chicken and eggs as well as electricity and gas.
Nevertheless, moving forward, Lee cautioned that increasing prices of goods and services are expected to crimp the lower and middle-income households’ spending power, leaving them with reduced disposable income for spending.
“Soaring cost of raw materials, the supply disruptions, higher operating costs and the worker shortage have impacted businesses’ working capital and cashflow.
“These costs and supply constraints, coupled with the lingering concerns about rising risk of the US recession and the consequential impact on the domestic economy, affect businesses and investors as they would adopt a cautious stance amid increasing expectations of the 15th general election to be called soon,” according to him.
Amid the high price pressures, Lee said subsidies and price controls help to ensure consumer welfare.
However, he warned that subsidies come with economic distortions and opportunity costs. He also said that subsidies encourage wastage of resources and corruption.
In the case of Malaysia, the country’s bloated subsidies raise concern about fiscal sustainability, according to him.
“In 2022, the bloated subsidies of RM77.7bil or more are estimated to make up 31.2% of the total revenue and 4.6% of GDP, largely due to soaring energy and commodity prices.
“The share of subsidies to total revenue has been increasing from an average 14.3% per annum in 2012 to 2019 to 16.6% per annum in 2020 to 2022,” he said.
Hence, the economist highlighted the urgent need to rationalise subsidies, albeit at a gradual and measured pace.
He stressed that a strong political courage is needed to implement difficult subsidy reforms.
“A well-handled removal of subsidies and be replaced by better targeted social spending for the poor and vulnerable households, plugging leakages and wastage, and productive investments can promote sustainable fiscal management and equitable outcomes,” said Lee.
While prices would creep up in the face of subsidy removal, Lee said there are a number of ways where the government can help the bottom 40% (B40) and middle 40% (M40) income earners.
For the B40 population, the government should upgrade the benefits or provide direct cash transfers to distressed households, according to him.
“(The government can) provide a one-off cost of living tax offset or a one-off cost of living cash payment for the poor households in need.
“Explore the use of MySejahtera application for the giving of vouchers,” he said.
As for the M40 population, he suggested a number of tax-related incentives to increase their disposable income.
“Extend tax rebate of RM400 to individual taxpayers with chargeable income not exceeding RM70,000 to ease some tax burden.
“Increase personal relief for contribution to the EPF to RM7,000 from RM4,000; and to RM5,000 from RM3,000 for life insurance premiums.
“(Provide) a personal relief of RM3,000 for housing loan interest payment for the assessment years of 2022 and 2023,” he said.
