Without any doubts that the Global Economy is already in a recession. Based on the current information it is quite certain that it won’t be a short one. The only thing that’s left is to predict whether it will be a small U curve or a long U curve (i.e. medium or long recession, and how deep it will be). The Asian Financial Crisis took us more than 5 years to come back into a level position – and must be understood that it happens while the rest of the world didn’t suffer as much as we suffer; and hence the performance of the Global economy assist our economies to recover faster.
A Deep Recession is on the Way
In my view, this recession is going to quite deep due to the following reasons:
- The total loss of liquidity in the system is so large: the tally so far: US10.5 trillion from the stock markets globally (US8.3 trillion is from the US alone), more than US500 billion from the US sub-prime, probably more than US1 trillion from banking losses,
- Further meltdown of the financial systems: meltdown of the US15 trillion mortgage markets (beyond the sub-prime, i.e. near prime and prime mortgages); many more trillions in corporate loan defaults and other consumer loan defaults, total collapse of global carry trades, as well as banking and financial institutions failures (which are continuing).
- The contagion across markets and economies are so large and very highly correlated. The US and all the advanced economies are clearly in recession; forecasted growth for 2008 is slowed down to 1.5% from about 2.8% in 2007; and the forecast for 2009 is to slow further to 0.5%. Major economies in Europe (Germany and the UK) are expected to have negative growths, while the US to come to almost flat growth. These major economies will be a drag for Global economies: to slow down from 3.9% (2007) to 3% (2008) and may drop to 2.5% (2009).
The numbers involved are astronomical and unprecedented in human history (in real terms as well as in absolute terms). It has a lot of similarities to the US Great Depression of the 30s, except that now it has become a global issue.
Are we (Malaysia) free from all these events?
Our Finance Minister II, in a statement yesterday says that Malaysia’s economy is healthy and well “insulated” from the events of the ongoing financial crisis. I am sure that this is a “political statement” to “calm” the domestic market players. Otherwise, only a fool will believe that we are safe.
As I have stated in earlier article, the effects will have a lag time of about 1 to 2 years for Malaysian economy to hall a full impact of these events. In another words, we have time to prepare and do what’s necessary. So the question is, are we going to repeat our mistakes in July 1997, when our government is making statements that: “the Thai Baht crisis, is an isolated event, and will have no impact to our currency; as we have a good balance of payments….etc”. What happened after that is a known fact: a total meltdown of the regional currencies.
What will (surely) happen?
On a quick note, I can list a few things that will definitely happen:
- Global slowdown will have impact on our exporters and our currency
- The commodity prices (palm oil etc), will be dropping (it has been over the last one year or so).
- Our stock market – will take longer time to recover
- Dampening of property prices as global banking crisis will also slowed down our banking sector.
- Inflationary pressures: as the Global economy is undergoing inflationary trends.
We also know that our GDP growth will also be affected by the Global phenomena. The real GDP is expected to be at 5.7% for 2008 and forecasted to be 4.8% for 2009; and in regards to inflation, the expected figures are 6% for 2008 and 4.7% for 2009. These numbers, while “not that alarming”, are definite reasons for concerns. The impact are much severe than what the numbers seems to say. (See my article on Inflation). Furthermore, this is assuming that the impact on the US and Europe, as well as Global economy are not much more severe than what is already known.
What can be done?
It depends a lot on what you do for a living. Generally, I always believe in managing my personal exposures. I am for one, have avoided the stock markets for a long while (out of personal believe that the liquidity trends has been unhealthy for a long while). Cash and near cash is always King. Continue what needed to be spent, but avoid excesses (or wastage) at all time (it is a virtue); Efficiency is very important, because it increases productivity. There are many things that you can do at your level.
Then the other question is: how about management of our economy? I guess this is where the concerns lie. Leadership of the economy and the country is at the crossroads. The level of corruptions in the system has reached to a point of almost endemic. For projects (or government spending) of even few millions are highly corrupted (in forms of kickbacks etc). The control and divides at the Finance Ministry is well known and well talked about, how the few plan and divide the “booty” of government contracts.
As a country, we have lost our “economic drivers” – activities that drive and push our country forward. Years of incompetent leadership and directionless economic policies has weakened our position. The new “leaderships” and the “young guns” in UMNO and the ruling elites that are on the verge of claiming their leadership titles are in no way having any brilliant or clear ideas of what, and how to reverse the current trends. I also doubt whether they have any real clue of what’s going on.