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What is a recession, and are we in one right now?

Have you felt that prices have increased? Do you feel that demand is sluggish? Well, the economy might just be in a recession.

A recession is a contraction in the economy for two consecutive quarters. If the Malaysian and US economy were to contract in Q2, then both economies would be in a recession. 

What has likely contributed to this is the increase in supply costs (Ukraine-Russia conflict, wages increase due to inflation) and sluggish demand.

Read on to uncover what got us here and what we can do to protect ourselves.

The US economy in real terms has contracted by 0.35%, from Q4 2021 to Q1 2022. (USD 19.8 trillion to USD 19.735 trillion). If the US economy were to contract again, the US would officially be in a recession.

(Source: St Louis FED Real GDP)

In Malaysia, in real terms (prices held at 2015), our economy has contracted by 2.96% from Q4 2021 to Q1 2022 (RM371 billion to RM360 billion). However, upon comparing Q1 2022 to Q2 2022 year on year, the economy is 5% larger. Comparing year on year may be preferable due to the cyclical nature of business cycles.

(Source: Moody Analytics)

Definition of a recession

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. Meaning, if Malaysia and the US were to contract in Q2 2022, both countries’ economies would be in recession.

Looking at both demand and supply

Demand side factors that may have reduced demand include, higher interest rates, reducing consumption and investment, Inflation reducing real purchasing power and a fall Government spending will less stimulus. 

Supply side factors that may have affected supply include, increase in inflation expectations have seen revisions in wages (resulting in higher production costs), increase in interest rates have increased the cost of borrowing, the Russia-Ukraine conflict has increased oil prices and reduced the supply of food (Russia and Ukraine were huge wheat exporters).

While this is a rough model, supply side issues have shifted the supply curve to the left (or Cost Push Inflation).  Reduction in demand on the other hand, has shifted the demand curve to the left.

Therefore, Gross Domestic Output of the economy has fallen (Q1 to Q2) and Price has increased from (P1 to P2). Illustrated here is the phenomena of less output and an increase in the price level, also known as Stagflation, which occurred in the 1970’s. 

The increasing costs in Malaysia could be attributed to electricity prices rising (as there are less discounts and subsidies) and increasing food prices. 

Fertiliser costs have increased making farmers purchase them less, reducing crop yields. Fertiliser costs have skyrocketed, as Ukraine was a huge exporter of fertiliser, and since they’ve been invaded by Russia, economic activity has stalled. Case in point in Malaysia, no musang season as durian yields are very poor.

(Source: The Guardian)

(Source: The Edge Markets)

Should Malaysians be worried?

The weakening Ringgit may help economic growth, as exports become more desirable. However, if other economies are in a slump, demand for exports would be minimal. On the bright side, there’s still room for Bank Negara to ease monetary policy to cushion against sudden shocks, given our interest rate is higher than the US.

(Source: The Edge Markets)

According to Bank Negara, Malaysia’s economy is expected to grow with increased demand, private sector expenditure and investment projects lending support to growth. But determinants to growth could be weak global recovery, increased supply chain disruptions, and deadlier COVID variants immune to vaccines.

General tips for staying safe in a recession:

Cash and savings are your ally; especially in the event of unforeseen circumstances (like a lost job). Furthermore, going into debt is problematic as one is burdened with increased obligations and a high interest rate environment means increased borrowing cost. 

It may also be worth doubling down on guaranteed investment returns like ASB, as stock markets are in an overall slump.

When it comes to investing, the argument for diversifying investments is such that, by creating a portfolio of non-correlating investment pairs, where one is up, the other is down, and vice versa (for example, stocks and bonds).

 

References :

Andreson, S., 2022. 7 Ways to Recession-Proof Your Life. [online] Investopedia. Available at: <https://www.investopedia.com/articles/pf/08/recession-proof-your-life.asp> [Accessed 26 May 2022].

Davies, E., 2022. Bad news for farmers – fertiliser prices just hit record highs. But these ASX producers could benefit – Stockhead. [online] Stockhead. Available at: <https://stockhead.com.au/food-agriculture/bad-news-for-farmers-fertiliser-prices-just-hit-record-highs-but-these-asx-producers-could-benefit/> [Accessed 26 May 2022].

Fred.stlouisfed.org. n.d. Real Gross Domestic Product. [online] Available at: <https://fred.stlouisfed.org/series/GDPC1> [Accessed 26 May 2022].

Analytics, M., n.d. Malaysia Real Gross Domestic Product | Moody’s Analytics. [online] Economy.com. Available at: <https://www.economy.com/malaysia/real-gross-domestic-product> [Accessed 26 May 2022].

Bnm.gov.my. n.d. National Summary Data Page for Malaysia – Bank Negara Malaysia. [online] Available at: <https://www.bnm.gov.my/national-summary-data-page-for-malaysia> [Accessed 26 May 2022].

Bnm.gov.my. 2022. Quarterly Bulletin 4Q 2021 – Bank Negara Malaysia. [online] Available at: <https://www.bnm.gov.my/-/quarterly-bulletin-4q-2021> [Accessed 26 May 2022].


Researchers: Muhammad Bahari, Calvin Kwa, Darryl Yeow

Reviewers: Muhammad Bahari, Faith Tan

Editor: Emelia Anne

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