WHILE the risk of stagflation is on the horizon for the global economy, and the risk of recession in Europe and the United States is growing, China's slower than expected economic growth in the second quarter is casting a pall on the prospect of Malaysia's own recovery.
The path forward for the Malaysian economy, especially in the second half of 2022, is challenging as it is contingent upon the external risks highlighted above. What is more, the prospects for the economy next year are too complex to forecast.
Stagflation, characterised by slow growth, high unemployment and a persistent rise in inflation, will hit the global economy if commodity and food prices go up indefinitely while the tightening monetary cycle continues worldwide.
A global recession will be more apparent if the Russia-Ukraine conflict worsens.
China's second-quarter 0.4 per cent gross domestic product (GDP) growth missed expectations; analysts had predicted one per cent growth.
Even last month's Industrial Production data missed the mark. It increased by 3.9 per cent from last year, versus the expected 4.1 per cent.
Looking at the April-June data from a quarter-on-quarter basis, China's economy had contracted by 2.6 per cent.
While the country is still grappling with Covid-19, the prospect is ambiguous, especially in achieving its full-year growth target of 5.5 per cent.
The economy had expanded just 2.5 per cent in the first half.
As a small and open economy, Malaysia is susceptible to these external developments.
On the domestic front, Malaysia is confronting an acute rise in the cost of living at a time when people have yet to recover from the long lockdowns.
Many lost their jobs or had their salaries cut, and businesses closed down
. Some people went bankrupt, leading to mental problems.
Food insecurity is on the rise, especially among low-income earners. Many children have dropped out of school and are no longer interested in pursuing formal education.
The expectation of another Overnight Policy Rate increase by Bank Negara Malaysia (BNM) in the foreseeable future will dampen people's purchasing power and further increase living costs.
This is especially true in Bottom 40 and Middle 40 households. They need help from the government.
The fact that there is a call for another round of special withdrawal from their Employees Provident Fund savings tells
a lot about the rising cost of living.
In the meantime, consumers are advised to cut spending. But when consumers spend less, businesses, especially small- and medium-sized enterprises, will be affected.
On another matter, the government's austerity measures have raised concerns, especially about job creation or the shelving of development projects, which may disrupt economic recovery.
The main concern is that stagflation may hit if the austerity measures are not properly handled.
In the meantime, the ringgit has slipped continuously against the greenback. The move by BNM to increase the interest rate is meant to prevent the local currency's value from dropping further.
There are also other factors causing the ringgit to depreciate against the US dollar, such as investor sentiment about the political situation in the country and the stability of the government.
It is hard to embark on structural reforms and a long-term economic agenda due to political instability and an unstable government.
However, the possibility of the Malaysian economy plunging into a recession like Sri Lanka seems unlikely as we still have fiscal space to manoeuvre.
Our monetary sovereignty is intact, unlike the island country.
What is critical, however, is for the government to establish a new toolkit for managing the economic issues and risks.
The writer is associate professor at the School of Economics, Finance and Banking, Universiti Utara Malaysia
