Averting a recession


Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz is confident that Malaysia will have positive economic growth at least until the third quarter of this year and emphasised that the country must be prepared for a slowdown in the global economy. With the warning bells already ringing, can steps be taken now for Malaysia to avert a recession?

KUALA LUMPUR: Given the global economic backdrop, many are predicting that a potential worldwide recession may be likely, if not inevitable, in 2023.

Earlier this month, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said that Malaysia will find it a challenge to avoid an economic recession next year.

Nevertheless, Tengku Zafrul is confident that Malaysia will have positive economic growth at least until the third quarter of this year and emphasised that the country must be prepared for a slowdown in the global economy.

With the warning bells already ringing, can steps be taken now for Malaysia to avert a recession?

Given the combination of worsening global economic conditions, greater geo-political risk affecting commodity and financial markets, as well as domestic issues, Malaysia University of Science and Technology professor Geoffrey Williams acknowledged that the risks of a recession are rising.

“We put it at 50:50 in our baseline scenario. The only measures that can be taken involve keeping the economy moving, promoting consumer spending, keeping interest rates low and improving the supply-side and competition in the marketplace,” he told StarBiz.

Centre for Market Education (CME) chief executive Carmelo Ferlito, however, believes that efforts to avert a recession should have been initiated during the height of the pandemic.Centre for Market Education (CME) chief executive Carmelo Ferlito, however, believes that efforts to avert a recession should have been initiated during the height of the pandemic.

Centre for Market Education (CME) chief executive Carmelo Ferlito, however, believes that efforts to avert a recession should have been initiated during the height of the pandemic.

“There is a certain rush today in blaming the international tensions for an economic downturn, which seems to be inevitable.

“However, the most recent facts such as the geopolitical conflicts, are only worsening something that had to happen as a consequence of the so-called anti-Covid policies.”

Ferlito emphasised that such policies did not quite improve conditions.

“They were instead the seed for an inflation-led economic crisis, as CME had predicted 1½ years earlier.

“So let’s be clear – there will be an economic crisis not because of the geopolitical conflicts, but because irrational and unscientific lockdown policies forced the government to implement enormously expansive fiscal and monetary policies.”

As a result, Felito said “the quantity of money grew at a faster rate than the country’s gross domestic product (GDP).

“Such a dichotomy between quantity of money and real economy-generated inflation and now the cost of those inflationary policies, need to be paid in terms of an economic downturn.

“Malaysia blindly followed the anti-scientific world trend and now finds itself sharing that same fate.”

Ferlito said Malaysia’s economic recovery so far has been driven by private consumption and government spending.

“This is the reason I say that having the “plus” sign in front of the GDP is not enough, if you do not look at the microfoundations.

“A GDP growing thanks to private consumption and government spending means that the recovery is resting on fragile and bad pillars, namely private and public debt and inflation. This makes the recovery unstable.”

On the flip side, Ferlito said external trade has done well, adding however that the situation could change, especially in light of China’s Covid-zero policy.

“What instead has been lacking are private investments, which are the true driver of a sustainable growth if paired with a growth in savings.

“For the future, I expect Malaysia’s economic growth to be even more fragile, as government spending will have to slow down if we want to seriously tackle inflation.”

Ferlito said inflation may slow down private consumption and that external trade may suffer due to the global uncertainties.

Malaysia’s economy grew 8.9% year-on-year in the second quarter of 2022, driven mainly by the continued pick-up in domestic economic activities following further reopening of the economy, as well as international borders.

Production activity improved for most sectors and robust consumer spending also contributed to the stronger growth.

While external trade also grew faster during the quarter, MIDF Research in a note said the trade surplus was smaller than the first quarter because higher commodity prices resulted in bigger imports.

“Compared to regional economies, Malaysia joins Indonesia and Singapore to record higher growth, better than the Philippines and other East Asian economies that saw stable or moderate growth in the second quarter of 2022.

“On a quarter-to-quarter basis, the seasonally adjusted GDP grew by 3.5% quarter-on-quarter, the third straight quarter of expansion since the fourth quarter of last year.”

Apart from relaxation of Covid-19 standard operating procedures, MIDF Research said it noticed that the low base effect, particularly when the nationwide lockdown started from June 1 last year, also contributed to the higher-than-expected annual growth in the second quarter of 2022.

On the assumption that a recession cannot be averted, Williams said interest rates should be kept low to accommodate a possible downturn. “Otherwise, rises in interest rates now will have to be reversed in the coming months,” he said.

Ferito believes that “brave measures are very much necessary,” if a recession cannot be averted.

“Obviously, very little can be done (by an economist) on the issue of international geopolitical tensions, but hopefully diplomacy will be at work to stop what is happening in the South China sea and in Ukraine.

“From the standpoint of the political economy in Malaysia, we need a cut in government spending through restructuring the public administration.”

Ferlito added that there needs to be a tax reform that reintroduces the goods and services tax, as well as a cut in income tax.

“We need more liberalisation in the labour market and in all the requirements for both domestic and private investments

“Cut red tape, etc. We need to shift the economic growth model from consumption to investments (and saving), in order to put Malaysia on a long-term sustainable growth path.”

Additionally, Williams said the upcoming budget should focus on tax reforms and supply-side liberalisation and avoid a laundry list of projects with no guarantee of any impact.

“Fiscal prudence will be important to ensure that there is some room for help if a recession emerges.”

If fiscal discipline is introduced and an investment-led recovery path is incentivised, then more initiatives can be taken to restructure and strengthen the social safety net, Ferlito said. “But not at the current level of government spending,” he added.

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