The dreaded "R" word

My earlier post referred to the MIER view as reported by the NST Online. There was, as expected, a little bit more to what was said by the MIER director, Mohamad Ariff.

Reduced growth, 40% risk possibility of a technical recession
The Associated Press report that was published in Singapore's Straits Times does confirm that MIER had cut its 2009 economic growth forecast for Malaysia to 3.4 per cent from the 5 per cent forecasted earlier. But, it also reported MIER's warning of a possible recession if the US economy deteriorates.

MIER warned that growth in 2009 may slump further if the US, one of Malaysia's top trading partners, goes into recession. From all indications, the US will, indeed, be entering a recession. How bad and how long is not known at this juncture.

Mohamad Ariff is quoted as saying that, There is a 40 per cent chance that Malaysia will enter technical recession in 2009, meaning two quarters of negative growth and a 30 per cent chance it could be a real recession lasting more than two quarters depending on what happens in the US.

MIER also said that the global credit crisis showed no signs of abating despite concerted interest rate cuts and massive liquidity injection by governments and central banks worldwide.

Another observation was that consumer and business confidence in Malaysia has dipped and warned conditions would worsen if the credit squeeze dries up funds for investment and household spending.

Ariff also said there are heightened concerns that the current global economic slump could drag on until the end of 2010 or 2011.

Possible increase in budget deficit to 5% of GDP this year

Given the economic pressure and declining oil prices, he warned Malaysia's budget deficit may exceed 5 per cent of gross domestic product this year and more than 4 per cent in 2009.

You may recall that the government raised development spending in August which it said will push the fiscal deficit to 4.8 per cent of GDP this year and 3.6 per cent in 2009, from 3.2 per cent in 2007.

This is what MIER has to say, Fearing a dismal global outlook and hit by rising prices of raw materials, the government stretched the fiscal deficit to 4.8 per cent in ’08, reversing a 9-year progressive deficit reduction. This may be justified as difficult times call for drastic measures. The longer-term worry is the high dependency on oil revenue to finance fiscal spending. Government revenue will be affected by the decline in commodity prices if other sources of revenue are not sought. Given the heightening pressure on the economy and decreasing oil prices, the budget deficit is likely to exceed 5.0 per cent of GDP in ’08. The deficit may even exceed 4.0 per cent of GDP in ’09 with the increasingly unnerving outlook.

Export sector is flattish

MIER reports that the monthly indicators up to July and August 2008 showed a loss of momentum.

Industrial output is flattening further as the export-oriented sectors faced diminishing demand.

Total exports have decelerated with electronics exports stalling, while commodity revenues are growing at a slower pace. The leading index is creeping up at its slowest pace this year, suggesting sluggish growth ahead.

Economic linkages

MIER noted that Malaysia has no direct exposure to the US market but is increasingly feeling the shock from the slowing US economy through trade and investment linkages.

The external downturn has not reached bottom yet. The US economy is on the brink of a recession, Japan has reported a contraction and Europe is coming to a standstill. Singapore has gone into recession in 3Q08 based on quarter-on-quarter growth.

In 2007, Malaysia's export totalled RM605 billion and it is projected to be at RM661 billion this year. For the record, Malaysia's major trading partners by value of exports in 2007 are:

US (16.4%)

Singapore (14.5%)

Japan (9.3%)

China (8.1%)

Thailand (5.1%)

Hong Kong (4.6%)

The economic outlook for these major trading partners are not good. The US, Singapore and Japan are in varying stages of commencing a recessionary cycle. China and Hong Kong's economies are sputtering. Thailand's economy is also slowing down.

The Minister for International Trade and Industry has said that Malaysia is quite comfortable and, we have other trading partners, so there should be no concern. Against the data set out above, perhaps he would care to specify in greater detail who these other trading partners are and, the forecasted value of Malaysian exports projected for these other trading partners. Some guidance, please.