MALAYSIA surprised the market by delivering a stronger-than-expected growth of 8.9% in the second quarter.
The post-lockdown recovery has picked up pace very well, even as the government unwinds its fiscal stimulus and certain subsidy measures.
However, going forward, concerns are mounting on whether Malaysia can continue its growth momentum, despite the risk of recession plaguing the whole world.
Riding an uneven recovery contributes to some uncertainty going forward and even Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz admitted that Malaysia’s economic outlook could be hurt by pessimism in the global economy.
“The weaker global outlook will certainly impact us,” he was reported as saying.
The overheating global economy has shown early signs of cooling down, with commodity prices coming off their multi-year highs and inflation expectations easing.
These developments are taking place as central banks rush to tighten their monetary policies.
But this comes at a great cost.
Economic growth forecasts across advanced and developing countries have been downgraded significantly and consumer sentiment is waning in many parts of the world.
With corporate earnings coming under pressure, an increasing number of companies are also cutting jobs and freezing hiring.
These include major corporations like Netflix, Tesla, Twitter and Shopee.
While these changes in the global economy are worrying, they are not entirely surprising.
As central banks – especially the United States’ Federal Reserve (Fed) – raised borrowing costs aggressively, businesses are scaling back their plans and households have turned more cautious in their spending.
By the end of 2022, the Fed targets to raise its benchmark federal funds rate to a range of 3.25% to 3.5%. Rates started the year at near-zero.
In the past, most recessions in the United States since the 1920 Great Depression have followed interest rate hikes by the Fed.
Many people think that the US is already in a recession, after estimates by the Bureau of Economic Analysis show that the world’s largest economy shrank by an annualised rate of 1.6% and 0.9% in the first and second quarters of 2022, respectively.
While this meets the common definition of recession, it is a practice in the US to wait until the National Bureau of Economic Research officially declares a recession.
The expectation of recession is not exclusive to the US alone.
Recently, the central bank of England warned that the country could fall into recession by end-2022.
The International Monetary Fund’s (IMF) chief economist also painted a negative picture, saying that the world “may soon be teetering on the edge of a global recession.”
Recession unavoidable?
At this point, it seems that a recession is unavoidable for many countries, including trade-dependent Malaysia.
Earlier this month, Tengku Zafrul admitted that global recession fears could affect Malaysia’s economic growth.
The growth of the domestic economy has consistently accelerated in the last three quarters, on a year-on-year (y-o-y) basis.
In the second quarter of 2022 (2Q22), the gross domestic product (GDP) rose by 8.9% y-o-y as compared to 5% and 3.6% in 1Q22 and 4Q21 respectively.
However, on a quarter-on-quarter (q-o-q) basis, the economy moderated with a seasonally-adjusted growth of 3.5%. In 1Q22 and 4Q21, the economy expanded by 3.8% q-o-q and 4.6% respectively.
Looking ahead, Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams says there is a “50:50” chance for Malaysia to face a technical recession.
With many of its trading partners facing sharp economic weakness, especially the US and China, it would be tough for Malaysia to escape from a recession.
According to an estimate by Socio-Economic Research Centre, Malaysia has a “very strong” growth correlation of 0.84 with China for the 2011 to 2021 period.
As for the US, Malaysia has a correlation of 0.73, which is considered “strong”.
For context, correlation ranges between minus 1.0 and 1.0.
The high and positive correlation between Malaysia and the two countries indicates that Malaysia is highly susceptible to a decline in GDP if both China and the US fall into recession.
China’s current economic weakness was rather self-inflicted, after its strict zero-Covid policy disrupted operations in its industries.
In the second quarter, China eked out a GDP growth of 0.4%, falling short of expectations.
The communist state is also feeling the heat from its collapsing property market, which makes up a third of its economic output.
The highly-leveraged property sector is facing a cash crunch, resulting in unfinished homes. A growing number of buyers, on the other hand, are refusing to pay for their mortgage loans until the homes are completed.
The domino effect from the real estate crisis has delivered a blow on the steel makers, as the reduced demand for steel dragged down steel prices.
As the Chinese property market crisis continues to spiral, concerns are mounting on the possible effects on Malaysia, given the close trade links with China.
A market observer even raised concerns about whether the cheap steel produced in China could be dumped in Malaysia and in turn affect local producers.
For an open economy like Malaysia, it can be vulnerable to external shocks, especially if the shocks emanate from its major trading partners.
Hence, the big question would be, is Malaysia prepared to face another round of recession after just coming out of the previous downturn?
Where does Malaysia stand?
The fact that the Malaysian economy is well-supported by domestic demand provides some comfort.
Thanks to the high domestic demand exposure, the country has the means to mitigate any shock to the economy caused by external reasons, to an extent.
Bank Negara, in its latest assessment, says that Malaysia’s growth in 2022 would be supported by strengthening domestic demand and reopening of international borders, which more than offset moderation in external demand.
Its policies are also crafted to smoothen the peaks and troughs of the economy, mindful that a consistent economy is of greater importance than a volatile one.
It also says that Malaysia’s diversified exports will cushion weaker external demand, going forward.
Nevertheless, the central bank also cautioned that risks tilted to the downside, mainly from weaker global growth and stronger price pressures.
It is noteworthy that apprehension over the economy is biting further into consumer sentiment lately.
Reflecting this is the latest Consumer Sentiments Index (CSI), which has dipped far below the 100-point optimism threshold to a four-quarter low of 86, losing almost 23 points quarter-on-quarter.
The Malaysian Institute of Economic Research (MIER), which compiled the CSI, says consumers gave an unequivocally more downbeat assessment of their near-term finances, and fewer of them are also expecting the labour market to pick up in the second half of 2022.
The Business Confidence Index also fell 4.5 points and settled below the 100-point threshold at 96.2 points.
MIER says businesses remain cautious about their prospects in the face of inflation and supply chain disruptions, despite the reopening of Malaysia’s international borders.
“A general increase in prices over time reduces Malaysian consumers’ purchasing power because a fixed amount of money allows for progressively less real consumption,” says the think-tank.
Being a country with a high exposure to trade, Malaysia cannot fully shield itself from external shocks.
Many experts think that there is an increasing possibility for a recession in 2023, although some believe any recession would be short-lived and shallow.
However, UOB Malaysia senior economist Julia Goh tells StarBizWeek that a global recession is not in its base case at this juncture.
She does, nonetheless, acknowledge that recession risks have risen for some major economies.
Challenges ahead
Looking ahead, Goh recognises that the global outlook is likely to be more challenging in 2023 as the world grapples with higher recession risks, inflation pressures and interest rates.
“Nevertheless we remain cautiously positive for Malaysia’s economy in 2022 amid multiple external headwinds.
“Domestic growth is likely to be sustained by reopening drivers in Malaysia and the region.
“We have seen improved cross-border investments from multiple sources in line with higher trade performance,” she says.
On the labour market conditions, Goh says the demand for labour should continue to increase across the spectrum of skills and industries.
Meanwhile, MUST’s Williams and HELP University economics professor Paolo Casadio say that the probability of a quarterly economic contraction in 3Q22 and 4Q22 is increasing progressively.
This is because of the deterioration in the outlook of the major international economies.
“We have raised our projection of a recession to 50% with the balance in a slowdown at best.
“The high 5% to 6% growth forecasts looks to have been jeopardised by the last two quarters; the inertia effect carrying over from high growth in 4Q21 and 1Q22 will play less of a role and the traction into the future will reflect the slower international economy,” they say.
Both Williams and Casadio add that domestic consumption will likely continue to grow in the third quarter, hence providing some level of support to the economy.
“But it is important to keep in mind that consumption is a lagging variable and it is not leading the business cycle.
“On the other hand, investments are forward looking, based on short-term expectations of domestic and external demand and discount the long-term perspective of the economy.
“So, short-term weakness that is being signalled will weaken investment,” they say.
Williams and Casadio also note that investment decisions rely on profit generation.
“We are seeing a deterioration in both profit margins due to cost pressures and the stagnation of sales.
“Finally, the important rise in risk and uncertainty in the international scenario adds to a likely delay in investment decisions, creating additional weakness,” according to them.
A quick check within the investing community show that many players – retail and institutional investors alike – have begun factoring in the possibility of a recession in their investment decisions.
In a reply to StarBizWeek, Affin Hwang Asset Management (AHAM) senior portfolio manager Lim Chia Wei says that the firm’s portfolios are structured to be more defensive to factor in higher recessionary risk.
A number of economic and financial indicators are pointing towards a higher level of recessionary risk compared to a year ago, according to him.
“These indicators include global consumer confidence, global industrial confidence and the US yield curve,” he says.
Amid the rising market uncertainty, Lim points out that AHAM has been holding a modest amount of cash in its portfolios since early 2022.
“Besides that, we have also reduced exposure to sectors that are highly vulnerable to an economic downturn. These sectors are banking, material and energy,” he says.
Nevertheless, Lim says AHAM is ready to grab the right opportunities when they emerge.
“The stock markets tend to bottom out and rebound before the end of a recession.
“As such, we are monitoring a few key indicators that will help to identify market bottoms.
“They will not be accurate but they do help assess market cycles. These indicators include earnings revision cycle, unemployment rate and manufacturing Purchasing Managers’ Index,” according to him.
Already a subscriber? Log in
Get 20% OFF The Star Digital Access
Cancel anytime. Ad-free. Unlimited access with perks.
