Both the World Bank and the IMF have raised their flags on recession fears. — AFP photos
ECONOMIES worldwide are facing new fears in the form of rising interest rates, high inflation and synchronised growth deceleration in the world’s top economies.
Investors and market observers fear of signs pointing towards a possible recession globally in 2023.
Many countries are facing a difficult balancing act: needing to raise interest rates aggressively to bring down inflation without triggering a recession.
Both the World Bank and the International Monetary Fund (IMF) have raised their flags on recession fears. On Thursday, the IMF said it is set to downgrade its forecast next week for 2.9 per cent global growth in 2023, citing rising risks of recession and financial instability.
According to IMF managing director Kristalina Georgieva, the outlook for the global economy was “darkening” given the shocks caused by the Covid-19 pandemic, Russia’s invasion of Ukraine and climate disasters on all continents, and it could well get worse.
“We are experiencing a fundamental shift in the global economy, from a world of relative predictability … to a world with more fragility – greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters,” she said in a speech at Georgetown University.
Georgieva said all of the world’s largest economies – Europe, China and the United States – were now slowing down, which was dampening demand for exports from emerging and developing countries, already hit hard by high food and energy prices.
The IMF would lower its 2023 growth forecast from 2.9 per cent, its fourth downward revision this year, when it releases its World Economic Outlook next week, she said.
Also, back in mid-September, the World Bank forewarned that “the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm, according to a comprehensive new study by the World Bank.”
Central banks around the world have been raising interest rates this year with a degree of synchronicity not seen over the past five decades – a trend that is likely to continue well into next year, according to the report.
Yet the currently expected trajectory of interest-rate increases and other policy actions may not be sufficient to bring global inflation back down to levels seen before the pandemic.
Investors expect central banks to raise global monetary-policy rates to almost 4 percent through 2023 – an increase of more than 2 percentage points over their 2021 average.
“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies,” said World Bank group president David Malpass.
“To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
Malaysia will not be spared if a global economic slowdown happens, based on its open economy system and heavy dependence on exports.
In its most recent Monetary Policy Committee (MPC) meeting in early September, Bank Negara Malaysia (BNM) decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.50 per cent.
As of time of writing, the ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.75 per cent and 2.25 per cent.
“The global economy continued to expand, albeit at a slower pace, weighed down by rising cost pressures, tighter global financial conditions, and strict containment measures in China.
“However, global growth continues to be supported by improvements in labour market conditions, and the full reopening of most economies and international borders,” BNM said in a statement.
Researchers with Kenanga Investment Bank Bhd (Kenanga Research) saw that BNM’s most recent policy statement appears to raise more concern on global growth outlook and its spillover effect on the domestic economy.
“Globally, BNM expects global growth to face challenges on impact of monetary policy tightening, China’s zero-Covid policy, and a potential energy crisis in Europe.
“While the MPC tries to avoid mentioning the “R” word, it reiterated that “downside risks to the domestic economy continue to stem from a weaker-than-expected global growth, further escalation of geopolitical conflicts, and worsening supply chain disruptions,” the research firm said.
On this note, BNM Governor Tan Sri Nor Shamsiah Mohd Yunus this week reiterated her belief that the Malaysian economy is not in a crisis and its growth trajectory remains positive, but warned that tthe country needs to reform to become an innovation-based economy.
“The fundamentals of the economy and financial system are strong and pre-emptive policy measures have been taken to help weather the challenging external environment.
“These are important facts on the economy and as Malaysians, it is important that we act in a manner that does not jeopardise the recovery and the confidence of investors, which in turn can create a negative self-fulfilling cycle,” she said in her feature address at the Khazanah Megatrends Forum 2022.
In her speech titled ‘Navigating Malaysia’s Economic Transition in a Post-Covid World’, Nor Shamsiah said the country’s economic recovery is well underway and growth this year is expected to be strong.
Comparing the current situation to the recent pandemic and the Asian Financial Crisis, the governor said the Malaysian economy is clearly on a stronger footing today based on the strong growth momentum, lower unemployment rate, well-capitalised financial institutions, and a more diversified economy.
This has led the Monetary Policy Committee to gradually adjust the OPR in May, July and September this year, she said.
According to her, the MPC is not constrained by a pre-determined path for the OPR and adjustments to the key interest rate will be done in a gradual and measured manner.
Nevertheless, she said, keeping rates too low for too long can, as seen in other countries, lead to distortions and imbalances, fuel inflationary pressures and weaken their currencies.
Nor Shamsiah pointed out that Malaysia needs to put in place reforms that completely transform the economy once again to secure a more sustainable and prosperous future in the face of future challenges and uncertainties.
Inflation rate and OPR (Source: Maybank IB)
The case for Malaysian inflation
WITHIN the country, the BNM governor expects inflation to peak in the third quarter of this year, noting that it is largely supply-driven but also due to stronger demand with the reopening of the economy.
“The extent of upward pressures to inflation will remain partly contained by existing price controls and the prevailing spare capacity in the economy,” she added.
She noted that the outlook next year will be more challenging due to a confluence of factors, namely rising geopolitical tensions and conflict, global inflationary pressures and extremely volatile financial markets.
“All these will lead to slower growth next year,” she said.
The latest figure for inflation from the Department of Statistics Malaysia (DOSM) – measured by the consumer price index (CPI) – shows an increase to 4.7 per cent year-on-year (y-o-y) in August 2022, as the gauge’s food and non-alcoholic beverage component remained the main contributor to inflation.
August 2022’s 4.7 per cent y-o-y inflation accelerated from July 2022’s 4.4 per cent y-o-y rise, according to the department.
This CPI print marked the sixth consecutive month of y-o-y increase since March, as the inflation gauge steadily crept up over the past few months. It grew 4.4 per cent in July, 3.4 per cent in June, 2.8 per cent in May, 2.3 per centin April, and 2.2 per cent in March.
Nonetheless, Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed highlighted that the inflation rate in Malaysia is one of the lowest in the world.
“The August inflation rate in the eurozone was 9.1 per cent, the US (8.3 per cent), Thailand (7.9 per cent), Philippines (6.3 per cent), and the Republic of Korea (5.7 per cent). The lower inflation rate in Malaysia is due to efforts from the Keluarga Malaysia government that has provided the biggest subsidy ever recorded in the history of the country,” he said in a statement.
Mustapa reiterated that the measures taken by the government have managed to control inflation in the country and that such measures will continue, especially via the Special Task Force on Jihad Against Inflation.
The future of overnight policy rate movement
FOLLOWING August’s CPI, economists have different opinions as to whether BNM will raise OPR in November.
Malaysia’s inflation may have peaked in August as the impact of price adjustments for various price-administered items and minimum wage hikes could have been fully reflected since May, said economists.
However, the base effects will still keep consumer price index (CPI) growth above four per cent for the rest of the year, before decelerating towards the two per cent level in 2023.
According to UOB Global Economics & Markets Research economists Julia Goh and Loke Siew Ting in a September 23 report, despite the consistently high CPI, BNM would take a more cautious approach when it comes to raising its policy rate to rein in inflation, despite its peers in the region as well as the developed world acting more forceful to keep price increases in check.
“Malaysia’s inflationary pressures are deemed benign relative to that of advanced economies and some regional peers such as Singapore, Thailand and the Philippines, mainly thanks to the huge blanket subsidies provided by the government.
“Therefore, while other central banks in the region have been forceful in their responses to rein in inflation, Goh and Loke believe that BNM will tread more cautiously, while monitoring the effects the three 25 basis points (bps) rate hikes this year has had on the economy and inflation, before deciding on the next move.
“This reaffirms our view for BNM to hold policy rates at 2.5 per cent for the rest of the year, before resuming its rate hikes to three per cent by mid-2023, should growth conditions hold up,” said Goh and Loke in the report.
On the other hand, MIDF Research believes that BNM is very likely to raise its policy rate by another 25bps in the last monetary policy meeting in November, due to core inflation that continues to increase and reached a new peak of 3.8 per cent y-o-y in August, amid strengthening domestic demand.
“We believe the current focus of BNM’s monetary policy setting is to ensure a sustainable recovery of Malaysia’s economy. With the rising core inflation trend and stronger-than-expected domestic demand, we expect further policy normalisation will likely be carried out in the next MPC meeting with another 25bps hike.
“However, the decision will be subjected to the stability of economic growth, the pace of price increases and further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand.
“From a medium-term perspective, the policy rate normalisation is needed to avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness.”
This was echoed by Maybank Investment Bank Bhd who predict for a total of 100bps hikes to 2.75 per cent in 2022.
“Out of this, 75bps hikes to 2.50 per cent have materialise, implying another 25bps hike at the next MPC meeting – and another 25bps hike to 3 per cent in early-2023, likely at the first MPC meeting next year,” it said in its analysis.
The team at Hong Leong Investment Bank Bhd (HLIB Research) believe that Malaysia “should be able to stomach higher rates”.
“While OPR hikes (or its expectations) generally lead to higher bond yields, we note that the current spread between the KLCI’s earnings yield and MGS10 is still relatively generous at 2.51 per cent,” it said following the latest OPR hike.
“Intuitively, this spread is a measurement of the relative attractiveness of investing in Malaysian equities vs the country’s risk free rate – a narrower spread makes equities relatively less attractive, vice versa. The last notable OPR upcycle happened in 2010 (coming out of the GFC) where rates were raised by 75 basis points that year.
“Despite the rate upcycle, the KLCI gained 19.3 per cent that year, spearheaded by the index heavyweight banking sector. Nevertheless, the positive effect this time around could be less profound given recessionary concerns in the US and Eurozone, and its contagion.”
Meanwhile, the US will require further interest rate increases in order to cool the world’s largest economy and rein in high prices, Federal Reserve governor Lisa Cook said. — AFP photo
Cautious eye on top world economies
GAUGING Malaysia’s economy takes plenty of cues from global economies as well.
Anand Pathmakanthan, head of regional equity research at Maybank Investment Bank Bhd (Maybank IB) warns of the dreaded ‘S word’: Stagflation.
“As if crumbling asset markets didn’t already have enough to worry about, World Bank president David Malpass twisted the figurative knife by stating a “perfect storm” of challenges could reverse years of economic development and raised the specter of a prolonged period of stagflation, a period of low growth and high inflation last experienced in the late-70s.
“In a stagflation scenario, management teams will need to defend margins and cashflows in real terms via a combination of cutting operating expenses and adroitly pass-on cost pressures to customers such that volume sales downside is minimised.
“TThe latter, especially in a domestic context where mass-layoffs are not the norm, is most easily achieved by corporates which are operating in sectors where demand is relatively inelastic, with additional supporting factors being strong branding and weak competition.
“Throw in heightened balance sheet stresses relating to working capital/payment cycle management (i.e. crucial to keep inventory lean and being paid early) and it’s clear stagflation is not a time for investors to give weak/opaque management teams and vulnerable businesses the benefit of the doubt.
And a long-term stagflation is exactly what is feared for the world’s top economy, the US.
The US faces a risk of long-term stagflation, or near-zero economic growth along with persistently high inflation – an outcome especially harmful to companies that are vulnerable to rising raw materials prices or a slump in “discretionary demand,” according to Moody’s Investors Service.
“The potential for a long-lasting stagflationary environment remains a concern that will persist until the current bout of inflation firmly subsides,” Moody’s said. The odds of recession during the next 12 months are 59.5 per cent, Moody’s Analytics said in a separate report.
A stagflationary economy would feature an unmooring of inflation expectations, “a much more aggressive” withdrawal of monetary stimulus and persistently weak economic growth, Moody’s said.
High energy costs would hit earnings in sectors such as airlines, autos, chemicals, metals, forest products and shipping, while rising materials costs would harm construction and manufacturing companies.
Concerns about a return of 1970s-style stagflation have risen as economic growth slows and price pressures remain high despite the most aggressive withdrawal of stimulus by the Federal Reserve since the 1980s.
The murkier outlook has compelled many CFOs to redraw their plans for prices, borrowing and wages.
Meanwhile, the US will require further interest rate increases in order to cool the world’s largest economy and rein in high prices, Federal Reserve (Fed) governor Lisa Cook said on October 6.
As US annual inflation has soared to the fastest in 40 years, the Fed has moved aggressively this year to tamp down demand, raising the interest rates five times, for a total of three percentage points.
And the central bank has said more increases are likely to come this year.
“Inflation remains stubbornly and unacceptably high, and data over the past few months show that inflationary pressures remain broad-based,” Cook said in her first speech as a member of the US central bank’s board, according to AFP.
While the Fed cannot act directly on supply, it can moderate demand by tightening monetary policy, Cook said in the appearance at the Peterson Institute for International Economics.
“We will keep at it until the job is done,” she said.
Her fellow Fed board member Christopher Waller warned that given ongoing price pressures, including from the US housing market, inflation is “not likely to fall quickly”.
“We haven’t yet made meaningful progress on inflation, and until that progress is both meaningful and persistent, I support continued rate increases,” Waller said in a speech on Thursday.
Both officials expressed concern about the widespread and persistent forces pushing up prices and said the Fed must remain focused on that threat.
“Restoring price stability likely will require ongoing rate hikes and then keeping policy restrictive for some time until we are confident that inflation is firmly on the path toward our two per cent goal,” Cook said.
Waller said that in addition to likely increases in November and December, “I anticipate additional rate hikes into early next year”.
He also downplayed speculation that sharp movements in financial markets might cause the Fed to ease off its aggressive stance.
“This is not something I’m considering or believe to be a very likely development,“ he said, noting that “markets are operating effectively” and the Fed has tools to address any strains.
Nationwide core consumer inflation in Japan will likely approach three per cent in coming months and may cast doubt on the BOJ’s view that recent cost-push price increases will prove temporary. — AFP photo
Japan’s inflation hits 31-year high
THE world’s third largest economy, Japan, sees its inflation reaching its fastest pace in over three decades excluding tax-hike distortions, according to a Bloomberg report on September 19.
According to Bloomberg, consumer prices excluding fresh food rose 2.8 per cent in August from a year ago, the internal affairs ministry said. Analysts had forecast a 2.7 per cent gain. It was the strongest reading since 1991, barring the effect of sales tax increases.
Rising energy and processed food costs continued to account for most of the year-on-year increase, while higher electricity prices and a smaller drag from mobile phone fees contributed to the acceleration.
Kuroda’s resolve to stick with stimulus has positioned the Bank of Japan (BOJ) as an outlier among central banks. The Federal Reserve, the Bank of England and the Swiss National Bank are among those likely to raise interest rates this week, leaving the BOJ looking even more isolated with its policy stance.
“The current cost-push inflation is bad for consumers, but the BOJ will keep easing, hoping it’ll eventually turn into positive inflation,” said economist Yuichi Kodama at Meiji Yasuda Research Institute in the Bloomberg report.
“The central bank’s policy won’t change until Kuroda’s term ends as this is the last, big opportunity for Kuroda” to truly revive inflation.
Core consumer prices in Japan’s capital Tokyo rose 2.8 per cent in September from a year earlier, exceeding the central bank’s two per cent target for a fourth straight month and marking the biggest gain since 2014.
According to a separate analysis by Reuters, nationwide core consumer inflation in Japan will likely approach three per cent in coming months and may cast doubt on the BOJ’s view that recent cost-push price increases will prove temporary.
The Tokyo core consumer price index (CPI), which includes oil products but excludes fresh food prices, was in line with a median market forecast and followed a 2.6 per cent gain in August. It matched a 2.8 per cent gain in June 2014.
Prices rose for a wide range of goods and services from electricity bills and chocolate to sushi and hotel bills, the Tuesday data showed, indicating that more firms were passing on rising raw material costs to households.
“The data showed price rises were broadening. We’ll likely see core consumer inflation exceed three per cent in October,” said Takeshi Minami, chief economist at Norinchukin Research Institute in the Reuters report.
“There’s still a strong possibility inflation will gradually moderate next year due to peaking energy costs and the chance consumers won’t be able to swallow further price hikes.”
The data is among key factors the BOJ will scrutinise when it produces fresh quarterly growth and inflation forecasts at its next policy-setting meeting on October 27 and 28. The nationwide CPI data for September is due on October 21.
BOJ Governor Haruhiko Kuroda has pledged to keep policy ultra-loose despite the recent rise in inflation, which he sees as driven by temporary factors rather than strong consumption.
But signs of broadening price rises prompted some BOJ policymakers to warn last month that inflation may overshoot expectations, highlighting the challenge Kuroda faces in justifying ultra-low interest rates. read more
The BOJ’s dovish stance, which makes it an outlier among a wave of central banks raising rates to combat rising inflation, has pushed the yen to 24-year lows and inflated the cost of importing already expensive fuel and raw material.
With inflation hurting his popularity, Prime Minister Fumio Kishida pledged to compile a spending package to cushion the blow from rising living costs.
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