TheStar
The malfunction in the financial systems of the US and Europe is affecting the entire economic system, including international trade as evidenced by the collapse in shipping rates. The validity of their government policies will determine the duration of the crisis.
SUDDENLY, the danger of desolation in the US economy has become the consensus view.
Economists and fund managers there are in unison now in their opinions the US economy would be in deep recession. Just a couple of months ago, much of the opinion was that a recovery was in sight by the middle of next year.
Quite abruptly, hardly anyone now is offering a view of the time to recovery.
Economists are stumped, as financial potholes keep popping up. In “normal” years, economists could forecast economic growth rates to within a decimal point.
At inflection points, however, economists are behind the curve in their forecasts as the business landscape changes too fast.
There is also disagreement as to what’s a recession. The most common definition is a period of at least two consecutive quarters of negative economic growth, which implies it would extend over a period of at least six months.
Economists defend that definition — dubbed a technical recession — as the most apt expression of a contraction of the overall economy. That means it might not be depicted as a recession if the economy does not register two consecutive quarters of negative growth.
The man-in-the-street, scorched in the stock or job market, may disagree with that.
Others may escape unscathed. It’s not always everybody’s recession. Some sectors, for instance, may continue to expand. In the financial crisis of 1998 in Malaysia, for instance, plantations and electronics enjoyed bumper profits.
This, however, looks like a broad-based recession in the US, impairing housing, banking, autos and consumer spending. It also threatens to be the first global recession of this century.
Everyone is watching when and to what extent this would impact on this country.
Data in the fourth quarter or next year, if not earlier, may define the degree of that impact.
In the corporate sector, a 50% decline in economic growth from 6% to 3% would feel like a recession. That’s because companies planted up capacities for 6% economic growth, and a lower growth of 3% could cause their revenue to decline 10% that would result in earnings declining 20% or more.
Currently, forecasts for Malaysia’s growth for 2009 range from about 3.4% to 1% by Macquarie which compared it to the experience of 2001.
In 2000, Malaysia’s economic growth for 2001 was forecast at about 6% but due to the Sept 11 terrorist attack in New York, the actual growth was 0.4%.
Policy risks
At this time of change — not what Barack Obama had in mind — the economic policies set out by governments are critical. They would either shorten and moderate the downturn, or prolong and deepen it.
Policy errors in the aftermath of the 1929 stock market crash infamously led to a long and deep depression.
This is the hour of government leaders. After years when the business sector in the US and Europe was deregulated, it became in effect unregulated, and government leaders now have to steer their economies away from the abyss.
So far, governments in the US and Europe have gone out on a limb to save their banking sector, injecting fresh capital and guaranteeing all deposits. That raises the risks of their sovereign debt and high inflation in later years.
“But what else can they do? If the banking system fails, there’ll be no economy,” a fund manager said.
Last week, Globex, a small Russian retail bank, disallowed withdrawals by depositors after a run on the bank.
It’s surprising the regulators allowed that, as it can lead to a nation-wide loss of confidence — it could be due to the government’s lack of experience in a market economy.
External risks
Asia is again experiencing the outflow of foreign equity funds. While foreign portfolio funds are a destabilising force, no country rejects the foreign funds.
Perhaps, that’s because foreign portfolio funds can destabilise stock markets, but not the banking system or the currency, unless there is massive speculation or manipulation of the currency.
External borrowings are a more potent destabilising force as shown in the current exposure of Iceland and South Korea.
Both countries have huge amounts of external borrowings, surprising in the case of South Korea, considering a similar experience in 1997. In Iceland, even consumer loans were taken in foreign currencies.
A sharp turn in the credit cycle led to questions as to whether they can rollover their foreign debts that were largely taken by their banks.
That uncertainty caused the Iceland krona to plunge 40% and the Korean won 30% since July.
It is to Bank Negara’s credit that the banking system and currency are relatively stable. In the banking system, the loan/deposit ratio is about 75%, which is very healthy.
In the west, the financial system is gradually being patched up, with UBS of Switzerland among the last big banks being rescued by its government last week, and the benchmark London interest rate for loans in dollars making its first weekly decline since July, according to Bloomberg.
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