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Malaysia: Concerns over recession-inflation
THE spectre of stagflation, or recession-inflation, looms large as high commodity prices stoke inflation while prospects for growth appear limited.
To many, it looks like the surge in inflation is not proving transitory but “sticky and sustained” in what is called stagflation – high inflation and unemployment, and stagnant demand.
Not helping the situation at all, is the Russia-Ukraine war that had dragged on for more than a month now, leading to fears of another Cold War.
It is a time when the government has to do more to expand the economy while boosting international trade.
Worldwide, all eyes are on the United States and China – how hard will they apply the brakes on inflation via interest rate hikes, and in implementing prosperity measures respectively.
There is a real risk of stagflation and the warning signs are there, even as there are hopes for some economic recovery.
Britain has cut growth this year to 3.8% from a previous forecast of 6%, while the US Federal Reserve now sees growth at 2.8% in 2022 from an earlier expectation of 4%.
The sanctions on Russia, leading to high commodity prices and supply chain disruptions again, will have an impact on growth, said Hong Leong Bank Bhd
managing director, global markets, Hor Kwok Wai.
The risk of stagflation is due to a likely persistence of high inflation amid commodity price surges and interest rate hikes dampening demand, especially without compensating increases in demand.
“There are some similarities now compared to the episode of stagflation of the mid-1970s and early 1980s, in rising inflationary pressure amid oil price shocks,’’ said Maybank Investment Bank chief economist Suhaimi Illias.
This is due to war or political instability involving major oil producers and exporters, a problem that adds to the already stretched global supply chain in the pandemic era.
Stagflation had occurred in the 1970s when oil prices doubled from 1973 to 1975, leading to high inflation and recession for large importers of oil.
However, this time, monetary policy tightening especially among major central banks, is happening at multi-speeds unlike previously, when it was synchronised.
The impact on growth is, therefore, uneven.
Growth this time is also questionable as many local companies are still struggling with restoring revenues lost especially during the lockdowns.
Meanwhile, hiring is slow and patchy, with employment gains mainly in the technology and commodities sectors.
As the growth in purchasing power remains constrained, growth in consumer demand may be sluggish.
“High prices are merely reflective of local and international supply chain disruptions, not a revival in demand,’’ said former Inter-Pacific Securities head of research Pong Teng Siew.
China is seeing a steep climb in Covid-19 cases, and hence, there could be more supply chain disruptions coming up.
There are pockets of optimism and hope for the future.
The government needs to accelerate the implementation of the Budget 2022 programme especially in relation to development expenditure.
The ratification of the Regional Comprehensive Economic Partnership could also boost international trade on the opening of markets and benefits under the largest free trade agreement in the world.
“Expansionary fiscal policy is crucial to facilitate the recovery process, and by extension, ward off the threat of stagflation,’’ said Bank Islam Malaysia Bhd chief economist Afzanizam Abdul Rashid.
The risk of inflation is quite visible following a sharp rise in, among others, food-related items and raw materials.
But there is some improvement as the number of unemployed is reduced to 680,400 in January 2022, from 782,500 in the same month last year.
The Malaysian economy also grew by 3.6% in the final quarter of 2021, after a contraction of 4.5% in the preceding quarter.
For now, the economy is growing and the government’s decision to allow international borders to be reopened could also lead to livelier times from the second quarter onwards.
In that sense, the risk of the Malaysian economy stagnating is quite remote, and therefore, the chance for stagflation to occur, is also low, said Afzanizam.
While downside risks look foreboding, global growth should stay broadly supported even though there is the spectre of an energy crisis.
There will also be regions in the world that are impacted by the Russia-Ukraine war, including the eurozone due to its close links with Russia.
Any protracted war between Russia and Ukraine will continue to raise global commodity prices, and hence, the risk of inflation.
For Malaysia, there is some uptick risk of inflation but the provision of fuel subsidies should help to blunt the impact, even though fiscal costs (relating to government finances) demand a close look, said OCBC Bank (M) Bhd economist Wellian Wiranto.
In terms of the power economies, US rate hikes would have to be carefully managed and China too may have to relax some of its common prosperity measures.
Using taxation and other income redistribution measures, China aims to boost incomes of the poor and ‘adjust excessive incomes.’
As long as the US and China do not apply the brakes too hard, stagflation can still be avoided, said Etiqa Insurance & Takaful Bhd chief strategy officer, Chris Eng.
On a year-to-year comparison, the risk of economic shrinkage for the Malaysian economy is not evident.
As more economies reopen, the recovery in volume will be seen in most industries.
“We are holding to our view that current inflationary pressures are largely driven by supply disruptions, which should normalize when production capacities recover,’’ said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong, adding that some prices may still stay ‘sticky.’
Despite our optimism, the world does not look as rosy as we thought it would be, at the end of 2021.
So we may have to get ready for quite a rocky ride ahead.
Source: https://www.thestar.com.my/business/business-news/2022/03/28/concerns-over-recession-inflation