Falling growth indicators cause concern
THE prospects for the global economy appear to be increasingly challenging, as the risk of recession rises.
Concerns centre on elevated global inflation, aggressive interest rate hikes in some countries and rates staying higher for longer.
Signs of slower demand are seen as economic activities weaken across the United States to Europe and Asia, according to the latest manufacturing and services indicators.
Our recession dashboard flags a 37% risk of global recession, compared with 33% in July, said United Overseas Bank Malaysia senior economist Julia Goh.
Is it possible that as Asean “lives” with Covid-19, it is partially decoupling from the US economic slowdown and potential recession?
Asean is emerging as a defensive harbour, said Maybank Investment Bank in its report, citing factors that include:
> Accommodation and food services, construction and air transport sectors are still below pre-pandemic levels;
> Strengthening intra-asean trade that will partly offset weaker Group of Three and China trade;
> Rising foreign direct investment and shifting manufacturing supply chains to Asean;
> Elevated energy and food prices benefit energy exporters like Indonesia and Malaysia;
> Less aggressive rate hiking cycle, except in the Philippines and Singapore;
> Relocation of headquarters and talent from Hong Kong, and capital inflows from Greater China on Us-china geopolitical rivalry and divergent Covid-19 strategies.
While the balance of risks for Malaysia is tilted to the downside, the economy is still at a decent growth rate of 6.9% for the first half of 2022, with full year growth likely at between 5.3% and 6.3%.
Malaysia’s fiscal deficit has narrowed to Rm45bil or 5.2% of gross domestic product (GDP) from Rm57.3bil or 7.7% of GDP in the previous corresponding period, largely due to a 16.8% growth in revenue collection.
But policy space is quite limited and the government has to ensure its fiscal sustainability; consumers must improve their financial literacy and businesses must boost their operational efficiencies as well as cashflows, said Employees Provident Fund (EPF) head, economics and research Afzanizam Mohamed Rashid.
The expected global economic slowdown will impact the local economy via slower external demand and easing prices of commodities and energy.
This will dampen domestic demand via lower export income and lower overtime pay for employees in the manufacturing sector, said Socio Economic Research Centre executive director Lee Heng Guie.
Investors’ concerns on global recession can cause volatility in the equity and foreign exchange markets.
The recent regional indicators flagged weaknesses in electronics output – global chipmakers are now bracing for a downtrend with growing inventory and shrinking demand amid massive upfront costs.
This will not augur well for Malaysia’s electronics and electrical exports in the near term.
Global economy
The outlook for 2023 is expected to be more challenging amid uncertainties surrounding the global economy, said Goh.
The pace of growth is expected to soften as the one-off cash aid from EPF withdrawals wane, together with the moderating effect of higher inflation and interest rates, as well as lingering external risks.
Meanwhile, the ongoing shortage of foreign labour continues to constrain manufacturers’ production capacity. Other problems include shortage of raw materials, higher cost pressures and currency volatility.
Among external risks, the US Federal Reserve (Fed) remains adamant on raising rates until it is convinced that inflation is well-anchored. The Fed funds rate is expected to reach 3.4% by end of 2022, and 3.8% in 2023, based on the Fed staff forecast in June.
Energy security in Europe is likely to be highly uncertain, following the military conflict in the Ukraine.
Inflation in Germany, France and Italy is hitting 7.9% (the highest since 1990), 5.8% (after 6.1% in July, the highest in 37 years) and 8.4% (the highest in 36 years) respectively in August.
This will pose a great challenge to consumer spending as real income has been eroded with the European Central Bank taking a hardline stance on inflation, which would see further rate hikes.
China, the second largest economy, has challenges such as the zero-covid strategy and steep correction in property prices.
China’s second quarter gross domestic product came in lower at 0.4% year-on-year from 4.8% in the preceding quarter, as the 5.5% growth target for 2022 looks highly attainable, said Afzanizam.
Cautious sentiment
Market sentiment will likely remain cautious against geopolitical risks in Eastern Europe with the war in the Ukraine, China and the United States as well as possible friction between the United States and Saudi Arabia.
But much of this worldwide slowdown has been priced in; following a potentially minor selldown in the next three months, global markets will likely rally while factoring longer term relief as Covid-19 is seen to have passed, said Etiqa Insurance & Takaful chief strategy officer Chris Eng.
As China completes its political events next month, it may, hopefully, loosen its zero-covid agenda, thus allowing more travel and spurring tourism in South-east Asia.
Times are still going to be tough and we should not be taken in by current buoyant growth numbers.