A QUICK NOTE ON THE ECONOMY

Economy is often looked upon as a complex subject and generally not well understood by most. As we are facing the current downturn, many did ask me, what exactly is going on. Let me just list out few of the main problems that we are facing now:

1. Collapse of global trade – the worldwide trade has slumped more than 50% due to lowering of the demands globally, lead by the major economies of the world, namely the US, EU, Japan and China. Malaysia is a trading nation; our trade volume is twice our GDP. It is expected that our trade (both imports and exports) will fall by the same percentage (50%).

2. Collapse of commodity prices. Our two main commodity – crude oil and palm oil, both declined in value by 2/3. What we have is double impact of having not only dropped in total volume, but also in total value.

3. Global liquidity crunch – which affected to some degree, domestic liquidity; in turns translates into lesser FDI and domestic investments, as well as banking liquidity. It will be expected that loan defaults will start to increase and non-performing loans will start to rise. Malaysian banks, while a bit insulated from global debacle, are still vulnerable to overal liquidity and domstic slump. BNM has in fact lowered down interest rates by more than 2% over the last three months to counter this effects. Hopefully, liquidity issues will not be our utmost worries.

4. Stock market prices – KLSE has been experiencing the bear market for six months; and probably would have to sustain the same environment for many months ahead. This will cause further drain on liquidity and loan defaults. As the earnings of the companies are affected (since many are depending on global trade), the price recovery might take longer than it normally would.

5. Industrial production – the total industrial output has declined by more than 30%; mainly due to closings of factories and lowering of total production due to slower demand. This trend is goin to continue until the global economy has resumed back its engine.

6. Employment – the total number of unemployed people will increase. I do not have hard figures, but by some estimates it can go as high as half million people or more will be left unemployed. The hardest hit are at the lower levels since thats where the job loss will occur most. However, I do not want to underestimate the job loss at the white collar (executive) level as well, since if this recession is a prolonged one (which might be tha case), the job losses will happen to them as well.

The above are just a quick summary, in case you wonder what exactly has happened.

The next question is: how the stimulus might work? This is where my problem lies. The stimulus is vague and in my view won’t do much to reverse the above trends; since items 1 to 3 are global in nature. Nothing much you can do to prevent them. Probably it may help on issues of unemployment or others. However, I am still not sure how are they going to implement it and what exact issues that they will address. Probably, we should just watch and see.

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