In Malaysia, subsidies are helping to limit the pass-through of high external costs to domestic consumers. But as the local economy continues to recover, and businesses continue to face high cost pressures, we may see higher pass-through of costs, said Standard Chartered Asean and South Asia chief economist Edward Lee.
WITH the United States inflation hitting a fresh high of 9.1% in June, there are concerns of more aggressive US interest rate hikes while sliding commodity prices have given rise to hopes of a peak in US inflation.
A slowdown may eventually occur from a pullback in consumer and business sentiment, concerns over recession and the impact of higher rates.
Although there has been some moderation recently, there is still much uncertainty on supply-side inflation caused by supply disruptions, as well as the potential lagged effect of cost pass-through by businesses.
Meanwhile, central banks are also tightening aggressively to rein in demand and lower the pass-through from high supply pressures.
In Malaysia, subsidies are helping to limit the pass-through of high external costs to domestic consumers.
But as the local economy continues to recover, and businesses continue to face high cost pressures, we may see higher pass-through of costs, said Standard Chartered Asean and South Asia chief economist Edward Lee.
With its current account surplus, Malaysia is much better shielded against rising US rates; however, it could also mean cooling export growth as US demand slows.
US rates are likely to climb further but a peak in US inflation may not be too far off, given sliding commodity prices of late; this will allow the US Federal Reserve (Fed) to ease off on its rate hikes, said HSBC chief Asia economist and co-head of global research, Asia, Frederic Neumann.
While fears of recession dominate, it is important to note that inflation risks are far from over, the Fed and other global central banks remain committed to continue their aggressive rate hikes in the months ahead.
The US dollar is likely to strengthen further into the current Fed rate hiking cycle, as its strength is boosted by elevated volatility and increasing safe haven needs.
This implies further weakness in the entire Asia foreign exchange bloc, and in view of China’s ongoing slowdown, further yuan weakness will also weigh on the ringgit.
For Malaysia, the growth outlook for the second half of 2022, is still positive, lifted by reopening drivers, strong exports and robust foreign direct investments.
At the same, there are emerging signs of caution as multiple headwinds could dampen demand and growth, said United Overseas Bank (M) Bhd senior economist Julia Goh.
Reopening had lifted growth in the first half of 2022, but three major shocks – the inflation shock, interest rate shock and potential recession shock – will undercut Asean’s economic recovery in 2022-2023.
Asean faces potential recession shocks from Europe due to the Russia-Ukraine war, a China hard landing due to its zero-Covid-19 strategy, and if the Fed is over-zealous in battling inflation, a US recession in 2023-24.
Maybank Investment Bank’s recession model, based on the US three-month and 10-year yield spread, estimates the probability of recession at 5% in Malaysia over the next 12 months.
The New York Fed model forecast only a 4% probability of recession, but the odds will rise as the Fed hikes rates; a Fed funds rate above 3.5% will likely tip the US and trade-dependent Asean economies into recession, said Maybank Investment Bank in a report.
The Fed drove up the its funds rate by another 0.75% for the second straight meeting of the Federal Open Market Committee in July, bringing the target range to between 2.25% to 2.50%.
Fuelling concerns of a recession, US gross domestic product fell at an annualised rate of 0.9% in the second quarter of 2022, following a 0.6% decline in the first quarter.
US consumer spending rose 1% on an annualised basis, sharply lower than in previous months as consumers spent less on goods and services.
US home construction dropped by 14% at an annual rate, weighed down by rising rates, while business construction fell by 11.7% at an annual rate.
Fuel prices are easing globally but food inflation remains high due to supply disruptions, and continues to pressure the currencies of many emerging economies that are both food and fuel importers.
As benchmark interest rates may still rise, the risk of default among some emerging economies remains elevated.
In Malaysia, as rates continue to be normalised, the ringgit may strengthen in the fourth quarter of 2022; Malaysia has a lower inflation rate than that of its peers in the region, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.
As markets expect US inflation to peak soon, countries that are less hawkish in raising rates, will see lower currency values, thus encouraging exports and trade.
Once US inflation peaks, funds will likely rush to emerging markets for a potential rebound in currency values and better growth rates, said Areca Capital Sdn Bhd CEO Danny Wong.
Markets have started to price in potentially weak US growth or even recession, on the back of slower consumer spending due to high inflation.
It may be too soon to expect the Fed to ease off on its aggressive rate hikes, as currently, US inflation shows no signs of abating and prices have yet to tumble.
There may be tougher times ahead before things cool down; hopefully, it does not slow down so much as to cause a severe recession where many people lose jobs and livelihoods.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.
