Weak consumer sentiment despite improved economy

THE Malaysian economy grew 5.8% in the second quarter, which is the fastest since the period between January and March 2015. For the whole year, the economy is expected to surpass 5% in growth, much better than what had been predicted early this year.

Foreign research houses have an optimistic view of the ringgit, setting a target price of RM4.10 against the dollar by the end of the year. This they base on improved trade movements of Malaysia.

To be fair, local economists were the first to predict a stronger economy and better outlook for the ringgit. Research firms such as Alliance DBS Research came out strongly ahead of Bank Negara’s quarterly economic growth figures.

If a Malaysian Institute of Economic Research (Mier) survey is anything to go by, then the optimism on the economy is not shared by the people on the ground.

The Mier consumer sentiment survey shows that people are still cautious on the economy. Although the consumer sentiment index has inched up by 4.4%, it is still at about 80 points, which is below the desired mark of 100 points.

There are several reasons for the bearish consumer sentiment, ranging from the fear of price hikes to job security. Incomes are trending up, but slowly, and not at the pace of the rising cost of living, especially in urban areas.

In rural and semi-urban areas, the rising cost of living is profound because the rate of wage rises and options for employment are much lower compared to the urban areas. However, their cost of living is also generally lower.

The unemployment rate in the second quarter was at 3.4%, better than the 3.5% previously but still far off from a figure that is much desired, which is closer to 3%.

Mire’s business sentiment survey shows better results. The business condition index has been inching up, standing at 114 points now, well above the threshold of 100 points. However, businesses are also cautious on the outlook. They say that domestic orders are strong, while production and exports are expected to come down.

The survey shows that business owners are more optimistic about the economy than consumers. However, both segments of the population are cautious on the outlook.

Why is that the case? Why is there a disconnect between the economy on the ground and the broad-based numbers recorded at the macro level?

This subject was even brought up at Bank Negara’s latest press conference when it announced the second-quarter economic numbers. There were no conclusive answers as to why consumer sentiment is weak when economic numbers are strong.

This is a subject matter that is often talked about in coffee shops when the portion of food is smaller or prices higher.

However, no study so far has been able to conclusively determine why consumers are negative on the economy when the economic numbers suggest otherwise.

One reason is obviously the continued rise in the cost of food and other necessities. The headline inflation may be down, but the price of food and beverages has been on the uptrend.

Economists say that prices are only up during the festive season. But do prices come down fast enough after the festive season? No, they do not.

Most of the time, the goods are repacked and sold at a discount only when the next batch of stock is due to arrive. Until then, the prices remain.

The headline inflation figure tends to show that the rate is manageable at 4%. But that is largely due to lower transport costs, which is only to be expected since there are many options at the moment for people to travel.

Apart from a hike in prices, the poor consumer sentiment is also due to the fear of losing jobs. Companies that are affected by `disruptors’ are under pressure to reduce the cost of doing business or be out of business completely.

The likes of Google, Facebook, Netflix, Uber and Grab are delivering products and services to consumers at a cheaper rate, thanks to technology and broadband connection. Taxi drivers are feeling the heat. Many have given their taxis back to the companies that they had leased them from and have become Grab and Uber drivers.

The traditional media and entertainment industries have long borne the brunt and are still evolving with the changing landscape. Today, Facebook and Google get the lion’s share of the advertisements because their services are shared for free.

The print and electronic media companies are left producing original content but having to contend with smaller returns.

Television stations – operating free-to-air or pay-TV broadcast - used to control the entire advertising spending in that sector. Today, the likes of Netflix and other over-the-top players have taken away a share of the viewers and are producing their own content.

Netflix, which was just a DVD distributor until 2012, is producing its own movies, challenging the large entertainment conglomerates such as 21st Century Fox and Walt Disney.

It is only a matter of time before technology disrupts the financial services sector that employs a huge number of people. Fintech (financial technology) is already on Malaysian shores and when it starts to pick up pace, banks will not hesitate to reduce the number of employees.

The broad economy is doing well, partly contributed by the vibrant manufacturing sector. But even that sector does not employ as many people as it used to because technology has allowed assembly lines to be less labour-intensive.

The Employees Provident Fund says 50% of the Malaysian workforce is in the informal economy and does not contribute to the fund. Nobody should be surprised because technology and its effects are taking shape faster than what many think.

Technology forces costs to come down. It is deflationary, and it is scary for a country like Malaysia where many industries and smaller companies are not prepared to embrace it.

While the broad-based economy is doing well, there is a lack of confidence in whether it can be sustained. The confidence that the vital trickle-down effect of the economy will happen eventually is lacking. And many wonder when the stock market will be roaring again.

Until that confidence can be restored, there will be a trust deficit on the economy and nobody will be able to explain why – not even Bank Negara.