IN THEORY, when economic activities improve, they'll be reflected in the gross domestic product (GDP) data.
In other words, businesses, consumption, investments, government spending and trade are expanding, which will reduce unemployment and increase inflation.
On the surface, GDP has improved, at an impressive 8.9 per cent in the second quarter of this year.
The latest unemployment rate is 3.7 per cent and the inflation rate has seen an upward pressure at 4.4 per cent in July.
Thus, when demand increases, there is a risk of high inflation, meaning the economy will overheat.
Therefore, contractionary fiscal policies are needed and tightening of monetary policies have to be put into place.
Fiscal policies are controlled by the government and monetary policies are governed by Bank Negara.
There must be a separation between the two. One entity cannot influence the other.
The decision by the government to impose a mild austerity measure and the much expected decision by Bank Negara to hike the interest rates by another 25 basis points are within the logic of economic theories.
Developments globally — in the United States, the United Kingdom, Europe, China and Ukraine — have validated the relationship between theories and practice and hence, the move by Bank Negara.
As much as economics must be driven by data, economics will always be a social science rather than a hard science. If it is a hard science, it must surely be a dismal one.
Simply put, there are always two sides of a story and the interpretation of the data must be based on local context, such as historical developments as well as the political situation.
In general, I think Bank Negara made the right move by increasing the overnight policy rate (OPR) by another 25 basis points.
After all, we could see evidence that the rise in inflation was to some extent due to demand-pull factors and not just a cost-push narrative.
But this move by Bank Negara will further increase people's living expenses, where their cost of borrowing will go up in tandem with the rise in the OPR as commercial banks will increase their interest rates.
More worryingly, right after the announcement to increase interest rates, the ringgit slipped further against the greenback, depreciating to RM4.72 from RM4.49 against the dollar.
The weakening of the ringgit this time will increase people's cost of living further through imported inflation.
Today, many people sustain their living expenses through personal loans and credit cards. They might as well continue applying for personal loans out of desperation.
In fact, bankruptcy rates, among the youth and the Bumiputeras, are on the rise. This is a time bomb that needs attention from the government.
This is where fiscal policies can make sure the bomb does not explode.
We should not compare our inflation rate with that of other countries, or argue that even other currencies have depreciated against the greenback.
If we do, then compare the cost of living and purchasing power of the people as well.
Only then can the comparison make sense to people, especially those in the B40, M40 and vulnerable groups.
Instead of an austerity drive, the government should spend big. It's whether the government spends it productively or otherwise.
For example, allocating almost RM80 billion for subsidies is an example of an unproductive spending.
Putting money to develop a better and more comprehensive social safety net is an example of productive spending.
Investing in climate change is another example of productive spending.
Nevertheless, even though our GDP numbers in the second quarter look good, but on a quarterly basis, they expanded slower than the previous quarter.
Although our investment numbers look good, our competitiveness index has dropped and the ringgit has depreciated further.
And even though our total exports recorded a convincing number, our net exports in the second quarter were negative, and were in fact worse than in the first quarter.
When the people's pockets have not recovered, it is difficult for them to appreciate all the "good" economic data highlighted by the government.
The writer is associate professor at the School of Economics, Finance and Banking, Universiti Utara Malaysia
