As global economic growth slows, will Malaysia head for a recession?

The International Monetary Fund (IMF) has highlighted that higher-than-expected inflation, particularly in major European economies and the US, has triggered a tightening of global financial conditions.

At the same time, amid a fresh wave of COVID-19 cases and lockdowns, China’s slowdown has been worse than anticipated.

IMF Economic Counsellor and Director of Research Pierre-Olivier Gourinchas has said global output has contracted in the second quarter of 2022 as a result.

“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” he said.

With stalling growth in the world’s three largest economies, Juita Mohamad of The Institute for Democracy and Economic Affairs (IDEAS) noted Malaysia, as a small open economy, would be vulnerable to global trends

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz has also said the country must be prepared for a slowdown in the world economy, despite its strong expansion after the reopening of borders.

The country’s inflation, as measured by the Consumer Price Index (CPI), increased 3.4% in June 2022 from a year earlier, driven by surging food prices.

“Unfortunately, we are anticipating higher inflation rates in the advanced economies of up to 6.6 percent,” said Juita, who is IDEAS’ Director of the Economics and Business Unit.

“But looking at emerging markets and developing economies, the inflation rate might go as high as 9.5% in the coming months.”

This, she said, would reflect the impact of cost pressures from disrupted supply chains and tightening labour markets.

“We do need to brace ourselves for the anticipated slowdown in global growth and global demand in the next coming months."

Global inflation rates may be beyond Malaysia’s control, but it can take measures to ensure its people are less impacted by external shocks.

As such, the country must be prepared with steps to safeguard the economy and society.

Juita said continuous upskilling and upgrading of talents was crucial within the digital economy, particularly for micro, small and medium enterprises (MSME).

While she acknowledged that federal resources have been poured into preparing MSME for digital platforms, Juita added that there must be routine assessments on the performance of such programmes.

“These programmes should not just aim to onboard MSME,” she said. “They should go even further beyond that for sustainability and to ensure that MSMEs are competitive enough to not just enter the digital platforms and digital economy, but to stay there as long as they can.”

Juita also pointed out that there was a lack of continuity with cash transfer programmes in Malaysia, with little to no monitoring on the impacts it had on vulnerable and targeted households.

As such, another area for the government to look into is further developing the country’s social protection system and empowering workers.