Stagflation unlikely

Sunway University professor of economics Yeah Kim Leng,

PETALING JAYA: The wave of stagflation, currently sweeping across some global economies like in the 70s, is unlikely to rear its ugly head in Malaysia owing to the country’s firm economic fundamentals.

Stagflation, a scenario where there is slow economic growth coupled with rising inflation, would unlikely occur in developing countries compared with developed ones, according to economists contacted by StarBiz.

Strong private consumption and investment, improvement in trade and high investor confidence due to the political stability are some of the plus points that would avoid stagflation headwinds from hitting the domestic shores.

Analysing the macro aspect of stagflation, professor of economics at Sunway University, Yeah Kim Leng, said a global stagflation is less likely, given the divergence in the pace of growth and inflation between the developed and developing countries.

He said the varying growth and business cycles across countries within each region and across regions also explain why a world-wide stagnation in growth, coupled with runaway inflation, has a low probability of occurrence.

This is barring an escalation of the Russia-Ukraine war or a major geo-political or climate-related supply shock disrupting global production of fuel, food or industrial products, added Yeah.

“Following the full reopening of all economies, especially China as the global manufacturer, and the easing of Covid-19 pandemic-related supply shortages, the spectre of stagflation is more likely in Europe and the United States.

“This is given the persistent inflation experienced by these countries and decelerating growth due to high interest rates and monetary over-tightening,” said Yeah, who is also one of the finance advisers for the Prime Minister and Finance Minister.

In the United States, April’s core inflation of 5.5% is higher than overall inflation of 4.9% during the month, both inching down by 0.1 percentage point from the previous month.

Given the slow decline, Yeah said a stagflation may rear its ugly head in the second half of this year for the world’s largest economy due to dimming growth and increasing downturn or recession risks.

The low or stagnating growth, coupled with persistent and elevated inflation, could extend the stagflation scenario to next year for the United States but less likely so for China and other developing countries sustained by domestic demand and rising trade and investment with each other, he said.

On Malaysia’s strength in withstanding the stagflation risk, Yeah said private consumption growth post-pandemic is expected to normalise to 6% of annual growth for this year.

“With a gross domestic product (GDP) share of 60%, a sustained growth in private consumption will contribute over three percentage points to the country’s projected annual GDP growth of 4%-5% this year.

“Another source of growth that could counter the external headwinds is gross fixed-capital formation where the current high volume of investment approvals, when fully implemented, would be another offsetting factor.

“Higher investor confidence arising from an improvement in the country’s political stability and growth-centric policies could boost the contribution of fixed capital investment to the country’s economic growth,” he said.

Meanwhile, Malaysia posted a strong GDP growth of 5.6% in the first quarter of 2023 (1Q23), driven higher by domestic demand.

The result was above the expectation of a Reuters survey of economists, which had a median forecast of 4.8% growth for the quarter.

On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 0.9%.

In line with the easing cost environment, headline inflation – as measured by the consumer price index (CPI) – was lower, averaging at 3.6% in 1Q23 compared to 3.9% in the fourth quarter of last year.

In March this year, the CPI moderated to 3.4% year-on-year (y-o-y) from 3.7% y-o-y in February this year. Core inflation increased by 3.8% y-o-y in March, but was 0.1% lower from February’s 3.9%.

Juwai IQI global chief economist Shan SaeedJuwai IQI global chief economist Shan Saeed

Expressing his bullish stance on Malaysia, Juwai IQI global chief economist Shan Saeed said the country would be spared from stagflation as fundamentally, it has strong macro variables backed by economic confidence from local and foreign investors.

The government has also effectively made use of its policies lever i.e. fiscal and monetary policies, he said.

“The amalgamation of fiscal and monetary policies can help spur growth in the economy. Every economy faces structural issues and can be addressed such as workers shortage, market convenience routes and allocation of resources.

“Monetary policy remains fairly stable while the ringgit has kept its range as per fair market value at about RM4.30 to RM4.45 against the US dollar.”

Furthermore, he said stagflation would have limited impact on the country’s growth stability, thanks to its strong consumption and investment outlook.

“The GDP size is on the rise, hitting US$380bil (RM1.7 trillion) last year. Policy consistency and robust trade and commerce numbers are providing strong impetus at the macro level.

“We at Juwai IQI expect trade numbers increasing by 8%-10% this year despite the tough external economic landscape globally. The opening of China is a real boon for the Malaysian economy in 2023,” Shan said.

On another note, he said the global economy is heading into stagflation and severe recession simultaneously and resonating with the 1970s era.

“I foresee the global economy will not be able to recover before 2026-2027. Presently, 60% of the global economy is in stagflation, 25% in recession and 10% on the verge of sovereign debt,” he noted.

Bank Muamalat Malaysia Bhd Chief Economists and Social Finance Mohd AfzanizamBank Muamalat Malaysia Bhd Chief Economists and Social Finance Mohd Afzanizam

While not ruling out the possibility of Malaysia being impacted by stagflation due to its open economy, Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid said the world economy has become so fluid and there is uncertainty whether the 500-basis-point hike in the US Fed Fund Rate since last year would be a trigger for the next banking crisis.

And the protracted war in Ukraine could morph into bigger military conflicts that could rupture the global supply chains, he said.

He said this requires the local government to be nimble in managing its limited resources.

He said this would have a good balance between meeting the short-term needs like cash transfers and subsidies to the mid to long-term horizon where the next generation is able to live comfortably.

Therefore, spending on education, healthcare and infrastructure is paramount, he said.

“Addressing corruption is also crucial so that it creates trust and confidence among the business and investing community as well as the citizens.

“Corruption can be a source of inflation too. So we need to have a broad and detailed view on how we would want to build a country that is fair, transparent and vibrant.

“Then execute the plan, monitor the progress and make some tweaking so that we will stay the course,” Afzanizam noted.

UCSI University assistant professor in finance Liew Chee YoongUCSI University assistant professor in finance Liew Chee Yoong

On whether Malaysia could be impacted in the event of a global stagflation, UCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, said it would depend on many factors.

These include the severity and duration of the stagflation, the strength of Malaysia’s economic policies and the global economic environment, he said.

“I believe that Malaysia has the strong economic fundamentals to weather these headwinds just like how it survived past financial crises, for example, the Asian Financial Crisis in 1997 and the global financial crisis from 2007-2009,” he noted.

Liew said the country needs to implement strong structural reforms such as deregulation, labour market reforms and trade liberalisation in order to mitigate the effects of the headwinds to a certain extent for this year and next year.

He anticipates the local economy to grow by 2% to 3% this year, given the current headwinds and the potential for a global recession.

Juwai’s Shan said he is maintaining his GDP growth forecast for this year at 4.5% to 5.5%.

Macroeconomic stability, solid consumption patterns, strong investment flows and trade and commerce numbers would drive the economic development of the country, he said.

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