Business

Monday May 4, 2009

Green shoots or dried lallang?


In times like these, it is important to maintain a sense of perspective and there’s a need to discern fact from fiction

ONE of the most actively debated economic issues today is whether the world economy is out of the woods. Do recent economic data really represent the green shoots of economic recovery later this year or are we merely grasping at dried lallang?

After the truly horrifying free-fall of the past six months, everyone would want to put the past behind if possible. And, according to quite a few commentators, there are now reasons for doing so.

Investors around the world have jumped onto the bandwagon and stock markets have gone for an invigorating run further flagging an imminent revival. (Stock markets have now pulled back until the seriousness of the present swine flu threat can be properly assessed.)

In times like these, however, it is important to maintain a sense of perspective. We have to make conscious efforts to discern the fact from fiction and to filter out the background noise.

In May of last year, just 12 short months ago, the world media was full of pronouncements by heavyweight institutions as to how inflation would go through the roof. Commodity markets went wild. Prices of minerals, even food grains, including rice, shot up.

Predictions were that crude oil would top US$200 a barrel. Food shortages were forecast to be rampant. Complaints by many, including producers themselves, that the world was being led down the garden path by speculators went largely unheeded.

Markets, we were told, were working to find the true scarcity value of these goods. As it turned out, this was hogwash. For all the numbers cited and arguments repeated, prices have headed south and investors caught with long positions suffered huge losses.

Cynical as it sounds, the lesson one can learn from this is that just because respected and influential organisations and highly paid bankers say something, and the number of times the media repeats it, does not necessarily make it so.

As we all know, statistics can also deceive as much as inform, especially when narrowly interpreted and taken in isolation. One example is the real US gross domestic product (GDP) numbers for the first quarter of 2009 announced last week.

At a negative 6.1%, it was worse than expected. Declines were registered across most demand components, with the main contributors being non-residential investment (-38%) and exports (-30%). Only consumption registered an unexpected uptick of 2.2% year-on-year.

Never mind that these figures are only advance estimates and based on incomplete data.

Preliminary estimates are only due at the end of the month. What many analysts chose to pick up on was not the multitude of red ink but the few isolated black ones.

Even then, the spin doctors seemed to be at work. One of the reasons for the larger-than-expected GDP decline was a large decrease in inventories. (Many factories have sharply cut production or gone out of business.) This, however, was taken as a case for a large increase in the latter part of this year.

But even if economic conditions are not getting worse, it does not necessarily mean that they must necessarily be getting better. Under the present circumstances, any positive development should be welcomed but negative ones cannot be discounted away totally.

There is a world of a difference between stabilisation and recovery. Unemployment may not be rising as fast. Exports could be going off the deep end at a slower rate. Home prices may not be falling as fast as previously. All of this could be setting the scene for a major rebound or simply establishing a new and vastly lower one.

In the past, stabilisation was followed by a quick, and often strong, upturn. There are very valid reasons to be concerned this time around whether such a turnaround can take place.

Record budget deficits need to be brought back under control. Enormous amounts of public debt needs to be retired. Exchange rates, in particular the US dollar, will have to adjust to the new realities. And all this will have to be done without damaging hard-won economic growth prospects.

This is a tall order and it is one that is extremely difficult to fill in a short time. By any account, a reasonable person would have to conclude that while there may be some positive signs, these are still too tentative and premature to signal an end to global economic crisis.

For Malaysia, and regardless of what the financial sector is signalling, the risks of recession have only improved very marginally. The present situation, as a whole and the manufacturing and services sectors in particular, is precarious and will remain so.

For the first two months of 2009, large double-digit declines have been registered in Malaysia’s industrial production (-18.8%), manufacturing sales (-26.1%), exports (-26.4%) and employment (-6.5%). As a result, real economic output could contract in the first quarter of 2009 by 2% or more.

We, therefore, cannot afford to let up a single iota in terms of comprehensive improvements in the economy. It is tempting to undertake a series of half-hearted measures in anticipation of the so-called recovery but this must be avoided at all costs. That recovery will, in all likelihood, be a long drawn-out, if it occurs at all.

  • Steven Wong is assistant director-general of the Institute of Strategic and International Studies (ISIS) Malaysia responsible for the bureau of economic policy studies.

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