THERE are 10 economic and market indicators to gauge whether the US economy is headed towards a recession, and it appears that an increasing number of data points are drifting into neutral or negative territory.
Should a US recession occur, Malaysia will have to keep domestic demand steady through supportive fiscal and accommodative monetary policies to offset lower external demand.
“If the US recession is shallow, and assuming that the Chinese economy stays positive, the Malaysian economy should be able to pull through with growth of 4% to 4.5%,” said Socio Economic Research Centre executive director Lee Heng Guie.
The US labour market is surprisingly strong, indicating there might not be a major recession; the extent of the economic slowdown also depends on the US Federal Reserve’s (Fed) stance on monetary policy.
A large part of Malaysia’s economy is still dependent on exports, which would be affected by any slowdown in external demand.
The government might roll out more fiscal stimulus and lower interest rates, if inflation has been largely tamed, said Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong.
Bank Negara has built up a reasonable level of policy space when the benchmark overnight policy rate (OPR) was raised to 3% recently.
In the event of a severe slowdown or recession, Bank Negara can resort to cutting the OPR, while the government can introduce tax cuts or spend more to stabilise the economy, said Bank Muamalat chief economist and social finance Dr Afzanizam Mohamed Rashid.
As in the past, the government had dealt with economic shocks by resorting to interventionist policies.
There are buffers to consumer spending such as drawdowns of excess savings built during the pandemic years from curtailed spending during lockdowns and stimulus measures.
The recovery in tourism and positive momentum in private investments will also help, especially in foreign direct investments as per trends in approved investments and supply chain relocations to de-risk against geopolitical uncertainties.
United Overseas Bank expects a US downturn in the second half of 2023, which will likely extend into early 2024, with no outright contraction this year.
No doubt the US labour market has proven to be more resilient that expected, there are still concerns on the cumulative effects of previous aggressive interest rate hikes.
The US ISM manufacturing purchasing managers index (PMI), that summarizes economic activities in the US manufacturing sector, is down at 46.9, from 47.1 last month, and from 56.1 a year ago.
The US ISM services PMI, at 50.3, is down from 51.9 last month, and from 55.9 a year ago.
However, the seasonally-adjusted final S&P Global US Services PMI Business Activity Index registered 54.6 in May, up from 53.6 in April.
The outlook is that of a mild and shallow US recession, said Maybank Investment Bank chief economist Suhaimi Illias.
Malaysia needs to keep its policies flexible and nimble, and ensure that industries and economic activities are broad and diversified, said United Overseas Bank Malaysia senior economist Julia Goh.
Some feel that Malaysia may have limited policy options.
Any share of the technology industry that has been gained in the past, at the expense of relocation out of China, will not last.
Those that re-shored here may find that Malaysian support industries, largely centred around Penang and southern Kedah, are lacking in too many respects, and that re-shoring to Malaysia is sub-optimal, said former Inter-Pacific Securities head of research Pong Teng Siew.
The public subsidy relocation incentives offered by the United States, Europe and Japan are not an option available to Malaysia.
With China’s drive towards tech self-sufficiency, backed by the scale of its local demand, Malaysia’s intermediate processing roles are being diminished.
Hence, Malaysia’s export growth has been affected, with recent effects on its ringgit exchange rate.
The already sharply weaker ringgit can be further weakened by cutting rates, which will raise the cost of commodity raw materials and inputs for consumption needs while exports cannot be boosted.
Rising US rates, high inflation, an inverted yield curve and turmoil within regional banks have been cited as reasons that a recession is imminent.
The Conference Board ‘s leading economic indicator for the Unite States has declined for the 13th month in April, signalling a worsening outlook.
The Conference Board forecasts a contraction of economic activity starting in the second quarter, leading to a mild recession by mid-2023.
The New York Fed’s recession probability indicator suggests a 68.2% chance of a US recession in the next 12 months.
The US yield curve has inverted; short term rates are higher than those in the long term, as the bond market prices in lower rates, going forward.
The three-month US Treasuries is at 5.12% compared to the 10-years at 3.80%, giving a negative spread of 132 points.
When the US yield curve is inverted, it normally takes one to two years before the onset of an economic recession; that had happened in the 1970, 1980s, 2006 and 2019.
By normal yardsticks, the United States would already have entered a recession; however, this has been postponed.
A big contributor is the deferral of repayments for student loans, but this will end in September 2023, and from then on, will trim consumer spending by about US$18bil (RM84.18bil) per month.
The Fed has indicated the possibility of recession in order to achieve price stability; at best, they would want the economy to slow down to a level where inflation is controlled.
The Fed’s main priority is to bring down inflation to 2%, as higher inflation will erode purchasing and lead to slower growth.
However, this can be quite tricky as households and businesses would react differently to rate shocks.
Therefore, we need to brace for the risks of a potential US recession while fine combing for some appropriate measures to deal with it.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.
