Could there be a recession over Malaysia’s horizon?

While the Madani government appeared to be concerned about Meta taking down prime minister Anwar Ibrahims’s posts from the “Save Palestine” rally at Bukit Jalil, a massive adjustment of equities markets occurred during the day.

On Monday the world was watching Japan’s Nikkei 225 plunging 12 percent, in what was the biggest single day fall since the stock crash back in 1987. This was immediately followed by the US Dow falling 1,000 points and the Nasdaq falling 4 percent. Tech and AI stocks were particularly hard hit. It was algorithmic brakes put in after 1987 that prevented the equities market fall develop into a catastrophe.

The KLSE fell by 69 points to 1,542 wiping out gains made over the last two months, along with exchanges across the region.

Its very speculative to predict where the market will head during the coming days, but Monday was a likely adjustment, reflecting overly high interest rates within the US, and the latest report indicating that unemployment could be on the increase.

With interest rates at the current level in the US, this could very easily result in a recession, with rising unemployment as US corporations face declining orders. The rest of the world is also falling in demand with both China and the EU facing economic questions. The Russian-Ukraine war and the MENA in danger of blowing up on several fronts there is great anxiety. Riots in Britian and other parts of Europe has brought cold stark realities of uncertainty to their respective countries.

This leaves Malaysia in a precarious position. If overseas demand drops, then Malaysia’s exports are certain to depress further more. This will lead to unemployment (mostly foreign workers), and less money flowing back into the domestic economy. This will start to effect local businesses by the end of the year and the 2025 economic outlook will look very poor.

Traditional Keynesian economists will start pointing to debt as a source of the problem. US debt is astronomical. As at March 2024, US public debt stood at 124.7 percent of US Nominal GDP. This has just been increasing unchecked.

The situation is somewhat similar in Malaysia where public debt is over 63 percent of GDP. Its not the debt level that is the problem, it’s the unwillingness of the government to lower the deficit and keep debt levels under control.

Malaysia’s GLCs have all lost value over the last 24 hours. The government will have to reel in spending due to potentially decreasing tax revenue to avoid increasing the budget deficit. Bank Negara Malaysia (BNM) must act quickly to lower interest rates for all agents within the economy will not suffer over the next few months.

Today’s rally of the KLSE and the Ringgit cannot be misread. The small rallies don’t take away the warning. There are some fundamental issues at stake, which the government must prepare for.

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