Recession fears overplayed for now, says BNM

Despite a multitude of warning signs that have preceded every previous recession, an expert denies Malaysia will experience one


MALAYSIA is not likely to suffer a recession in the near term, despite warnings of a potential global meltdown amid global trade tensions and slowing growth in major economies, as well as increasingly volatile financial markets.

Bank Negara Malaysia (BNM) director of economics Fraziali Ismail (picture) said any recession fears are merely overplayed globally.

“Categorically, we are not seeing a recession risk, be it globally or domestically,” he said at a media engagement session on the US-China trade war in Kuala Lumpur yesterday.

While global indicators such as inflation, employment numbers and growth figures may be lower than before, they are not “outright ugly”, and there are still upsides such as the US experiencing its lowest unemployment rate since the 1960s, while consumption remains strong.

“It will take a lot of shock for the global economy to move into negative or very low territory. Yes, we’re seeing modest growth, but we’re a bit far from a recession.

“What we’re seeing is slower growth compared to our long-term average. At the same time, there are downside risks to that assessment and we have to be mindful of those downside risks,” Fraziali added. Growth on both domestic and international fronts has been affected by the ongoing US-China trade war, as fluctuating and protracted trade developments have resulted in heightened uncertainties and amplified financial market volatility.

Affin Hwang Investment Bank Bhd on Tuesday warned of a very real possibility of a global economic recession happening next year, adding that Malaysia must take immediate measures to safeguard against the event.

Recent omens of a financial crisis include the US Treasury yield curve inversion in March this year — the yield curve inversion has happened before each of the past seven recessions over the last 60 years.

The US Federal Reserve’s increasingly dovish stance, coupled with low unemployment rates in the US, has also been a harbinger of a recession in the past.

If the trade war worsens to the point of every trade between the US and China being tariffed, this would bring global growth from an estimated 3.3% to about 3%, Fraziali said.

“By global standards, 3% is pretty low and some countries will fall into recession, but it’s not as big as the global financial crisis. It’s a huge shock, yes, but on its own, it won’t plunge the economy into recession,” he said.

Therefore, the focus should be on preparing for slower growth and preparing those most affected, rather than “ramping up” to counter a recession, as “more modest, more moderate growth” — not a recession — is on the cards.

“Maybe the government can think about where to prioritise its expenditure within the confines of its fiscal reforms.

“For example, in an economic slowdown, rather than growing at 4.3% to 4.8% (Malaysia’s GDP forecast), you’re growing at 4.3% which is relatively low by our standards. Who will be most affected by that and how can we help? Let’s prioritise that,” Fraziali said.

Malaysia’s export growth is directly impacted by the trade war, given that China accounted for 13.9% of domestic exports in 2018, while the US received 9.1% of local shipments, as per data from the Department of Statistics Malaysia.

Fortunately, the country is also already seeing signs of trade diversion benefits. From July 2018 to April this year, Malaysia grew its market share in the US and China imports by 4.2% and 4.6% respectively.

Gains in the US market were mainly in tariffed electrical and electronics (E&E) products, while additional market share in China imports came from tariffed commodities and petrochemical products.

However, while there are some benefits from a trade war, there are no real winners in this game, hence the need for Malaysia to re-look its strategies for the future.

“As global E&E manufacturers are searching for alternative supply sources in Asia, swift and strategic action to attract quality foreign direct investment to Malaysia will strengthen our competitive positioning,” Fraziali said.

He also called for continuous perusal of multilateral trade agreements, particularly within the Asean region, to strengthen trade and investment linkages among member countries, while enhancing the region’s attractiveness as a manufacturing and investment destination.