‘Risk of war, sanctions may lead to uncertain prospects’

KUCHING: Malaysia is relatively insulated from recent developments such as US’ inflationary pressures due to the former’s status as a commodity exporter, but analysts note the risk of a prolonged war or escalated sanctions could lead to heightened uncertainty of global economic prospects and tighter financial conditions.

The research arm of Hong Leong Investment Bank Bhd (HLIB Research) gathered that with the rise in US inflation reaching a 40-year high of 6.4 per cent year on year (y-oy), there has been increasing concerns of stagflation, similar to the 1970s.

“While we see some similarities, we do not think this is the same boat,” HLIB Research said.

“Firstly, the US government is expected to embark on a gradual fiscal consolidation.

“Secondly, the Fed has changed course to signal its commitment to tackle inflationary pressures.

“And thirdly, long-term inflationary expectations remain relatively anchored.”

While HLIB Research does not think the US is going to see a repeat of 1970s stagflation episode, the on-going RussiaUkraine conflict does add a layer of complexity, which increases stagflationary risks.

According to the research arm, prolonged higher energy prices on top of an already strained supply chain and strong underlying economic growth may push inflationary expectations higher.

“We think this may pressure central banks to continue signalling their strong commitment to avoid de-anchoring of inflation expectations.

“Over time, tighter monetary policy is expected to cause growth slowdown or risk an outright recession.

“While Malaysia is relatively insulated at this point due to its status as a commodity exporter, the risk of a prolonged war or escalated sanctions could lead to heightened uncertainty of global economic prospects and tighter financial conditions, which could eventually weaken international demand and foreign direct investment (FDI) prospects.”

For now, HLIB Research maintained its gross domestic product (GDP) of 5.5 per cent with downside risk and 25 basis points (bps) overnight policy rate (OPR) hike in the fourth quarter of 2022 (4Q22).