Unitar International Malaysia economics professor Anthony Dass
PETALING JAYA: Although there are growing signs that the world economy may slow down or even potentially fall into a recession from higher interest rates due to rising inflationary pressures next year, there are measures that the country can mobilise to cushion the impact on its economy.
Economic experts said the government has various policy tools and measures to ensure the domestic economy continues to register growth, albeit at a slower pace of about 3% to 4% in 2024 from the projected growth of between 4% and 5% this year.
Malaysia posted a disappointing gross domestic product (GDP) growth of 2.9% year-on-year in the second quarter (2Q23).
With external demand turning sour, economists are forecasting the economy to grow closer to the lower-end of Bank Negara’s official guidance of 4% to 5% this year.
The Financial Times recently quoted economists as saying higher interest rates in leading economies mean global growth is likely to slow next year after outperforming expectations so far in 2023.
Output would expand 2.1% in 2024, according to an aggregation of forecasts by the consultancy Consensus Economics, down from the 2.4% the economy is expected to log in this year.
The caution centres on the belief that persistently high demand would keep inflation higher for longer, forcing rate-setters in advanced economies to keep borrowing costs elevated well into next year, it noted.
The now strong chance that the United States economy would avoid a recession this year “means the Federal Reserve (Fed) would keep rates higher for longer to fully quell inflation, resulting in slower growth in 2024”, said Mark Zandi, chief economist of Moody’s Analytics.
China’s economic slowdown post-Covid-19 pandemic rebound also contributed to economists’ pessimism for 2024.
Unitar International University economics professor Anthony Dass told StarBiz that to ensure the economy can withstand any further headwinds in 2024 from a slower global economy, the government should continue to ensure the resilience of domestic demand remains and the current strong labour market conditions stay intact.
“Given the need to still focus on fiscal consolidation, we should promote more aggressively the public-private partnership not only in infrastructure projects, but also in other low-hanging fruits that will support domestic resilience.
“We must work in collaboration and not in silos to withstand the headwinds and move forward. Focus should take into consideration suburban and rural areas besides the urban,” Dass, who is also KSI Strategic Institute for Asia-Pacific economic adviser, said.
The government would need to embark on the much-awaited goods and services tax (GST), as reintroducing the GST to generate revenue would not be an issue.
What is important is to ensure a better system on the refunds, he said.
He said the GST rate should not burden the people, but still help widen the fiscal revenue base to enable a faster reduction in the fiscal deficit and lower the government debt ratio substantially.
Dass said, “As this broad tax base system would increase indirect taxes, it will give flexibility to the government to reduce direct taxes (personal income tax and corporate tax) to make Malaysia a more attractive business destination.
“And our exports will become more competitive on the global stage as no GST is imposed on exported goods and services, while the GST incurred on input can be recovered along the supply chain.”
UCSI University assistant professor in finance Liew Chee Yoong
UCSI University Malaysia assistant professor of finance Liew Chee Yoong said he was on the same page with global economists that the world economy would likely witness a slowdown next year due to higher borrowing costs from higher interest rates.
Liew, who is also a research fellow at the Centre for Market Education, said there could be a possibility that China may experience a major recession next year, which may have repercussions on other economies such as Malaysia as the country is a major trading partner of China.
He foresees major economies like the United States and other developed nations going into recession next year.
“The risk factors are numerous, ranging from inflationary risk to geopolitical risk to the risk-spillover from a possibility of a major recession in China,” he added.
Liew, who is projecting a GDP growth of 3% next year, said Malaysia needs to be prepared for the possibility of major recessions occurring in developed economies as well as in China.
If this occurs, he said the nation would be affected economically and the government needs to be prepared with the necessary policy responses to be implemented.
He said the type of policy responses that can be used are fiscal policy stimulus, monetary policy interventions, the social safety net provision and financial subsidies provided to struggling sectors.
On the social safety net provision, Liew added that it encompassed unemployment benefits, food assistance programmes, healthcare assistance, housing assistance, utility assistance, educational support, direct cash transfers, reskilling programmes and childcare support.
Not ruling out the fact that the global economy may stage a slowdown next year and spark a recession in the United States and developed economies, Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid said: “My worry is that market commentators appear to be downplaying the signals from the bond yield curve inversion in the United States.
“The difference between the 10-year and three-month US Treasury yield has been negative since October last year until now.
“The spread between the two US Treasury yields stood at 120 basis points currently. Based on our estimates, the probability of a recession in the United States has gone up to 64% from 32% in the second quarter of this year.”
He said this was something that the government needed to be mindful of in respect to how the weak external demand would affect the overall GDP next year.
Fortunately, he said Bank Negara is in a position of strength in respect of the overnight policy rate (OPR), as it has normalised the rate by 125 basis points since May last year.
The central bank has kept the key benchmark interest rate unchanged at 3% at its Monetary Policy Committee meeting this month.
In its monetary policy statement, Bank Negara said global growth, while still expanding, remains weighed down by persistently elevated core inflation and higher interest rates. The central bank said the slower-than-expected growth in China also weighed on the global economy.
Bank Negara also noted that the outlook for growth is subject to slower momentum in major economies, higher-than-anticipated inflation out turns, an escalation of geopolitical tensions and a sharp tightening in financial market conditions.
It said domestic financial conditions also remained conducive for financial intermediation amid sustained credit growth. “These factors will continue to underpin the growth momentum going into 2024,” Bank Negara said.
Mohd Afzanizam, who is predicting the economy to grow around 4% by next year, said Malaysia should be able to withstand the impact from the slowing global economy or even a recession.
“We have seen in the past, an external slowdown or global recession will be transmitted via trade and investment. Through monetary and fiscal stimulus, the country was able to minimise the impact.
“There is always a risk of a recession. What matters is that the government needs to be on alert, as it might need to be on standby to prescribe a stabilisation policy when the times come.
“That’s quite standard the way I see it,” he said.
Economics professor at the Malaysia University of Science and Technology Geoffrey Williams
Economics professor at the Malaysia University of Science and Technology Geoffrey Williams concurred that there could be slower global economic growth and risk of recession in major economies due to harsh monetary policy tightening.
On the domestic front, Willimas said with low inflation, stable interest rates and a strong reform agenda rolling out, the country should see normal but moderate growth next year of around 4%.
Besides a stable government, he said the domestic issues should be the priority as external factors outside the control of policymakers would be uncertain and may drag down growth.
The inflation environment is improving and prices should remain stable, he noted, adding that he did not foresee the need to raise interest rates unless there are unexpected shocks.
At the same time, he said the country needs to see what changes are envisioned in the revised 12th Malaysia Plan and the upcoming Budget 2024.
As for major economic trends to look out for in the global arena and also in Malaysia next year, Williams said: “There will be a continuation of some of the themes of this year, including the ongoing conflict in Ukraine but other features may change.
“Interest rate hikes will end, so there should be some respite for the economy. Inflation is likely to fall significantly and we will see whether there has been too much contraction by global policy makers.
“The problems in the Chinese economy will become more clear and the significant debt problems and slow growth will continue to be a drag on the economy.
“There are some risks of higher oil prices and these may pass through to consumer prices as 2024 unfolds, raising the risk of higher inflation.”
