The great transition is here

 

From Paolo Casadio and Geoffrey Williams

The final GDP data for 2022 is here and it showed that the economy contracted by 2.6% in Q4 on a seasonally adjusted basis compared with Q3 after slowing down in the previous three quarters.

The headline growth data showed a slowdown in annual growth in Q4 by more than half compared with Q3. On a quarterly basis the growth rate also slowed from 4.8% to 3.5% overall.

This is consistent with the general view that the economy is slowing but it is still quite rosy with overall growth for the year at 8.7% which is an exceptional rate of growth not seen since 2000. But we should not celebrate.

The seasonally adjusted data shows a completely different picture which is not at all rosy. Overall GDP contracted by 2.6% which is the first stage of a technical recession. If this continues on an annualised basis the economy would contract by more than 10%.

The seasonally adjusted contraction in activity is broadly based. Services contracted by 2.6%, manufacturing contracted by 2.4%, mining fell by 3.7% and construction fell by 7.3%. Only the agricultural and palm oil sectors rose, by a modest 1.4%.

In terms of the drivers of growth, private consumption fell by 2.9%. This is the second consecutive quarterly contraction in seasonally adjusted private consumption after a fall of 1.2% in Q3, signalling a sort of technical recession among private consumers.

Investment was stagnant at only 0.3% growth and government expenditure fell by 5.4% as the pre-election boom ended. We saw a free fall in exports, down 5.4% compared with the previous quarter but luckily matched by a slightly bigger contraction in imports giving a net positive contribution from trade.

This is consistent with a significant change in what we call the “Great Transition” to a new phase of economic performance. It is what we have predicted for some time now even if other forecasters have not seen it yet.

It reflects the deep damage done by the lockdowns and the policy mistakes of pushing excessive demand last year. This forced growth at twice the underlying supply potential of the economy while failing to implement supply-side reforms to create an agile, competitive business sector to meet that extra demand.

This is one reason for the high inflation and higher interest rates we have seen recently.

It also shows that Bank Negara Malaysia (BNM) was right to pause hikes in the overnight policy rate (OPR) as we had recommended. They must wait and see how the earlier 100 bps rises have affected growth, if at all, before making their next move. It signals that the OPR might be flat for the rest of the year now that it is in its normal historical range.

For 2023, headline growth may be as expected at 4% to 5% overall but seasonally adjusted growth shows weakness across the board which must be handled delicately.

The lockdowns changed the structure of the economy which is not in line with the conventional wisdom, so we need new eyes on the structural reforms needed in this new phase.

The labour market is not improving as much as people think. With no social protection system, people have to take whatever they can whether it is a proper job or not.

Structural underemployment – people taking jobs below their qualifications or working shorter hours – number nearly two million people and 7.2 million people are outside of the labour force, including 900,000 graduates.

Incomes and average wages have not recovered above 2019 levels and the extension of the minimum wage exemption, which could cover 1.8 million people, will also hit low-income groups.

So while consumption in 2022 was pushed by government spending, private debt and EPF withdrawals, which we will not have in 2023, the effect of consumer spending this year will be more muted.

We must recognise that the lockdowns changed the structure of the economy and its ability to recover. This is not in line with conventional wisdom, so we must have new eyes on the structural reforms needed in this new phase.

If we respond to these data by thinking everything is fine then we will be missing the underlying reality that we need economic reform.

Any policy that follows the same philosophy of the last two to three years will cause lasting damage and hinder growth.

On a positive note, we still see a slight build-up in inventories but they have contracted significantly from the previous quarter.

Another positive side of the story is that this new scenario should help to slow inflation to around 2.5%, barring new external shocks in oil or global growth.

So the picture is clear, the “Great Transition” is here. The government should start working from here. - FMT

Professor Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams is an economist at the Malaysia University of Science and Technology.

The views expressed are those of the writers and do not necessarily reflect those of MMKtT.