When the US sneezes, Malaysia catches a cold

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PETALING JAYA: There’s a ‘30% to 40%’ chance that Malaysia will face a recession next year, and much of that depends on the ability of the US, Malaysia’s third-largest export destination, to avoid an economic collapse.

The bad news is that there is a “very strong possibility” that the United States will suffer a downturn in 2023, according to the executive director of the Socio-Economic Research Center (SERC), Lee Heng Guie.

Lee said the main uncertainties about a U.S. recession are its timing and severity.

“A recession could also occur in the European Union, but that depends on how the Russian-Ukrainian crisis unfolds,” he said at the SERC’s quarterly economic monitoring briefing yesterday.

For the time being, however, the SERC has kept its economic growth forecast for Malaysia at 4.1% for 2023. It also did not factor recession risk into its forecast.

As for 2022, the SERC predicted growth of 5.2%. After a 5% expansion in the first quarter, Lee expects the Malaysian economy to continue growing by 6% to 6.5% in the second quarter of 2022.

The stronger projected growth is due to the reopening of the economy and the effect of Hari Raya holiday spending.

In addition, higher growth is also possible with the fourth withdrawal from the Employees Provident Fund (EPF) of at least RM40.1 billion, of which 40% of the amount will be used to supplement daily essential expenses. or monthly.

However, economic momentum is expected to slow in the second half of the year amid rising inflation, weakening global growth and synchronized global monetary tightening.

Lee said the country’s real gross domestic product (GDP) is expected to grow 4.5% to 5% in the July-December 2022 period, from 5% to 6.5% in the first half.

He pointed out that Malaysia’s growth in the second half would also be held back by cautious domestic demand, subdued exports and the fading stimulus in consumer spending.

On inflation, Lee estimated that Malaysia’s headline inflation would rise from 3% to 3.5% in 2022, but pointed out that the country’s inflation remains contained compared to other neighboring countries.

This is due to the various measures implemented by the government such as subsidies and price caps on cooking oil, fuel, chicken and eggs as well as electricity and gas.

Still, going forward, Lee warned that rising prices for goods and services are expected to weigh on the purchasing power of low- and middle-income households, leaving them with reduced disposable income for spending.

“Rising raw material costs, supply disruptions, rising operating costs and labor shortages have impacted companies’ working capital and cash flow.

“These supply costs and constraints, coupled with ongoing concerns about the growing risk of a U.S. recession and the resulting impact on the domestic economy, are affecting businesses and investors as they would adopt a cautious stance amid rising expectations. of the 15th general election to be called soon,” he said.

Amid heavy price pressures, Lee said subsidies and price controls help ensure consumer welfare.

However, he warned that subsidies come with economic distortions and opportunity costs. He also said that subsidies encourage wastage of resources and corruption.

In Malaysia’s case, the country’s bloated subsidies raise concerns about fiscal sustainability, he said.

“In 2022, inflated subsidies of RM77.7 billion or more are expected to account for 31.2% of total revenue and 4.6% of GDP, largely due to soaring energy and material prices raw.

“The share of grants in total revenue has increased from an average of 14.3% per year from 2012 to 2019 to 16.6% per year from 2020 to 2022,” he said.

Thus, the economist stressed the urgent need to rationalize subsidies, although at a gradual and measured pace.

He stressed that strong political courage is needed to implement difficult subsidy reforms.

“Well-managed removal of subsidies and their replacement with better targeted social spending for poor and vulnerable households, plugging leakage and waste, and productive investments can promote sustainable fiscal management and equitable outcomes,” Lee said. .

As prices rise in the face of subsidy removal, Lee said the government can help the bottom 40% (B40) and middle 40% (M40) in several ways.

For the B40 population, the government should increase benefits or provide direct cash transfers to distressed households, he said.

“(The government can) provide a one-time cost-of-living tax offset or a one-time cost-of-living cash payment for poor households in need.

“Explore the use of the MySejahtera app for voucher redemption,” he said.

As for the M40 population, he suggested a number of tax incentives to increase their disposable income.

“Extend the RM400 tax rebate to individual taxpayers whose taxable income does not exceed RM70,000 to alleviate some of the tax burden.

“Increase personal relief for EPF contribution to RM7,000 from RM4,000; and RM5,000 to RM3,000 for life insurance premiums.

“(To provide) personal relief of RM3,000 for home loan interest payments for the 2022 and 2023 assessment years,” he said.

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