Monday, August 11, 2008

Stagflation is very real

There is a real concern that rising inflation and slower GDP growth remain the 2 big threats to Malaysia’s economic health despite the easing of oil prices. Bank Negara appears to be adopting a wait-and-see attitude about the GDP numbers for the 2nd quarter of 2008 which will reveal whether demand-pull factors were having an upper hand in dictating the level of inflation. At present, inflation is essentially cost-push in nature, fuelled mainly by higher oil prices.
No decoupling: Impact of US and China economic slowdowns on Malaysia
The US economy continues to slow down despite some stimulus packages being rushed through. Consumption is declining. This decline is having a direct impact on the Chinese economy.
Many believe that it is the cooling of demand for commodities by China, that eased the pressure on oil prices. Instead of being driven down by a boost in oil supply, the global market prices of oil are actually being dragged down by a slowdown in China’s economy, which has the highest demand for oil in the world.
It is this self-same cooling Chinese demand that is dragging down CPO futures prices. CPO futures for September delivery fell RM53 to RM2,785 a tonne last Friday. CPO is the second-largest component of local exports. It was seen as a buffer to the Malaysia’s already moderating electrical and electronic exports.
Easing of inflationary pressure, poor economic growth
Malaysia’s move to have a more flexible petrol price-setting regime, based on average monthly world crude oil rates beginning next month might ease inflationary pressure, but where is the economic growth in 2009 going to come from?

A slowdown in China’s economy will translate into reduced imports of Malaysian goods. China, Singapore, the US, Japan and India were Malaysia’s top five export destinations in June, accounting for 53.2% of our total exports.

So, easing of inflationary pressure does not mean that the economic outlook will improve.
The thing to bear in mind is the firm view that there is a strong correlation between the real GDP growth of China and, that of Malaysia.
The signs do not look good for Malaysia’s economy next year.

1 comment:

Jed Yoong said...

I agree TOO.
Real growth is probably close to zero or negative...
But I think China will still continue to expand. But slower, it will ease inflation.
Then when prices are lower, things will expand again.
But I am a believer to the multiplier effect...
Like Dr M suggested wage increases should trickle down/multiply.
Right now the G multiplier (from govt spending is negligible) as it's probably too restricted to a small group and may be "exported" too if you know what i mean. Like to Perth.