There is a “30% to 40%” chance for Malaysia to face a recession next year. That largely depends on whether the United States (Malaysia’s third-largest export destination) manages to avert an economic meltdown. There is a “very high possibility” for the United States to suffer a downturn in 2023, according to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie. Lee said the main uncertainties about a US recession is its timing and severity.
Source: https://www.freemalaysiatoday.com (Rawpixel pic)
For the time being, however, SERC has maintained its 2023 economic growth forecast for Malaysia at 4.1%. It has also not factored in the risk of recession in its forecast. As for 2022, SERC predicted a growth of 5.2%. After a 5% expansion in the first quarter, Lee expects the Malaysian economy to grow further by 6% to 6.5% in the second quarter of 2022.
The stronger projected growth is on the back of the reopening of the economy and the Hari Raya festive celebration spending effect. In addition, a higher growth is also possible thanks to the Employees Provident Fund’s (EPF) fourth withdrawal amounting to at least RM40.1bil, of which 40% of the amount will be for the purpose of supplementing daily or monthly essential expenditure. However, the economic momentum is likely to decelerate in the second half of the year amid rising inflation, weakening global growth and synchronised global monetary tightening.
Lee said the country’s real gross domestic product (GDP) is likely to grow by 4.5% to 5% in the July-December 2022 period, as compared to 5% to 6.5% in the first half. He pointed out that Malaysia’s growth in the second half would also be restrained by cautious domestic demand, moderate exports and the dissipating consumer spending stimulus.
But not accounted for is the severe shortage of workers (1.2 million). Without them, manufacturing, construction and plantations are constrained. Essentially, that will impact GDP by a percentage at least. So that will taper overall growth to 3.5-4.5% for 2022.
On inflation, Lee opined that Malaysia’s headline inflation would increase by 3% to 3.5% in 2022, but highlighted that the country’s inflation remains contained compared to other neighbouring countries. But with imported inflation, food prices (inflation) will be double that.And this is despite of the various measures implemented by the government such as subsidies and price ceiling on cooking oil, fuel, chicken and eggs as well as electricity and gas.
Increasing prices of goods and services are expected to crimp the lower and middle-income households’ spending power, leaving them with reduced disposable income for spending. This is a tax on the poor. The rich are less impacted by inflation. In 2022, the subsidies of RM77.7bil or more will make up 31.2% of the total revenue and 4.6% of GDP. The share of subsidies to total revenue has been increasing from an average 14.3% per annum in 2012 to 2019 to 16.6% per annum in 2020 to 2022.
Hence, the need to rationalise subsidies, in a gradual and measured pace. For the B40 population, the Government needs to provide direct cash transfers to distressed households. It can be one-off or over a period. Then a number of tax-related incentives have to be reviewed to increase disposable income. The lower income group will be best to spend any additional relief which will benefit overall growth.
As I have said before, the Government has to review consumption patterns and improve domestic consumption; assist private sector investment whether DDI or FDI; look at high impact Government projects and finally enhance exports and services. If we could this without a political agenda, we will recover quickly even from a downturn.
Reference:
When the U.S. sneezes, Malaysia catches a cold, Ganeshwaran Kana, The Star, July 13, 2022
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