Undoubtedly the international border reopening effective April 1 has enabled Malaysia to achieve a higher economic growth rate of 8.9 percent year-on-year (y-o-y) during the second quarter (Q2 2022) which outperforms the market forecast of 6.7 percent.
Even so, it will be from a previously lower base effect accumulated since the third quarter of last year when the economy contracted by 4.5 percent (due to enhanced lockdown measures imposed to stop the “third wave” of Covid-19).
However, it is still way too early to tell whether Malaysia remains consistently on a positive economic trajectory for the next two quarters (Q3 & Q4 2022) as well as next year (2023).
The Department of Statistics Malaysia revealed a substantial rise in the headline inflation rate since Q2 2022 – from 2.3 percent y-o-y in April to 2.8 percent and 3.4 percent in May and June, respectively.
Among all items, the food & non-alcoholic beverages category remain the main contributor (i.e., in terms of the levels) to the overall inflation rise – from 4.1 percent in April to 5.2 percent, 6.1 percent, and 6.9 percent in May, June, and July, respectively. The restaurants & hotels group recorded a rise in inflation from 5 percent in June to 5.8 percent in July.
However, in terms of the percentage increase month-on-month, the housing, water, electricity, gas & other fuels category experienced the most increment (i.e., in terms of the differences) by 2.6 percent – from 1.2 percent in June to 3.8 percent in July.
The reason is due to the lower base effect last year as a result of the electricity bill discount given to households under the National People’s Well-Being and Economic Recovery Package (Pemulih) from July to September 2021.
The increase in headline inflation also reflected higher core inflation – which measures changes in prices of all goods and services but excludes prices of volatile items of fresh food and goods controlled by the government – going up to 3.4 percent in July.
Stagflation is an economic condition characterised by stagnant economic growth, accelerating inflation, and high unemployment.
Although the ringgit appreciated in relation to the renminbi over the past two weeks, Malaysians will still find goods from China are now more expensive compared to two years ago. As of September 2020, CNY1 was only worth RM0.6067.
In 2020, Malaysia imported RM55.5 billion in food products compared to its exports of RM33.8 billion, leaving it with a deficit of RM21.7 billion. When more dollars are required to purchase the same amount of imported food and goods, this will continue to exert downward pressure on the ringgit.
There is an increasing concern that Malaysians will further cut their spending if food inflation rises between 7 to 8 percent in August and September.
When aggregate demand drops, it will contribute to lower real GDP growth.
The plausibility of the rise in food price inflation also correlates with findings from Bank Negara (BNM).
According to its Quarterly Bulletin for Q2 2022, headline inflation is expected to trend higher during the remainder of the year.
Although BNM adjusted the overnight policy rate (OPR) twice this year, the policy measure has not helped mitigate inflation.
The increase in OPR implies that those servicing housing and car (and other personal) loans have to pay more for their monthly installment payments. Indirectly, it has increased the financial burden of households, especially among the lower M40 and B40 households struggling to cope with various living expenses such as food, utilities, children’s education and medical treatment, etc. in this rising cost-of-living period.
As Malaysia’s favourable economic growth during Q2 2022 (Figure 4) was mainly driven by government policy initiatives, private consumption grew at 18.3 percent y-o-y compared to the previous financial quarters.
The implementation of the minimum wage hike, Bantuan Keluarga Malaysia (BKM) cash transfers, Employees Provident Fund (EPF)’s special withdrawal scheme of RM10,000, and the Sales and Services Tax (SST) exemption for new vehicles were among the policy support that provided an additional boost to consumer spending.
Notwithstanding, would Malaysians be able to allocate more money out of their savings when they exhaust all of their EPF withdrawals and cash assistance from the government – at a time when the OPR hikes are contributing to higher costs of living and doing business?
It would, therefore, seem to be overly optimistic for Prime Minister Datuk Seri Ismail Sabri Yaakob to claim that Malaysia’s projected economic growth could achieve between 5.3 to 6.3 percent growth in 2022.
In a nutshell, to avoid Malaysia moving towards recession or even the possibility of stagflation, the government should take pro-active and pre-emptive steps to effectively and properly manage the cost-of-living crisis affecting businesses and households by requesting Bank Negara to halt any impending OPR hike and, instead, plan for monetary “loosening” with a drastic reversal by Q4 this year.
This will give the rakyat a much-needed breathing space – to recover and build up their savings. At the same time, the government needs to discuss with the central bank what should constitute policy normalisation going forward.
Not least, as has been consistently called for by EMIR Research, the government needs to also embark on greater/closer fiscal and monetary policy coordination.
This will ensure that deficit spending is not leaked towards higher interest payments (for our bonds), for example.
Amanda Yeo is Research Analyst at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.
