When the US sneezes…

Just over the weekend, Smiley (a good friend of mine) and I had a gossip an intellectual discussion about the latest sex scandal issue about US recession and whether it would hold or not. Then, I came across an article on The STAR commenting on the impact of US recession in Malaysia.

Here is an excerpt of the article:

US recession won’t hurt Malaysia much

Sunday January 13, 2008

BACHOK: The Finance Ministry does not expect Malaysia to be drastically affected if the United States, which is the world’s largest economy, spirals into recession this year due to external and internal issues.

Deputy Minister Datuk Dr Awang Adek Hussin said that while there may be some effects, the country’s gross domestic product (GDP) figure was still poised to register a 6.5% forecast growth.

The economy’s positive factors are driven by the global appreciation of commodity prices, healthy domestic consumption and high crude oil price momentum.

“Our fundamentals should remain steady despite worries about the US economy. We are not unduly worried even though the price of crude oil has touched US$100 a barrel as we also benefit to a degree,” he said after attending the opening of a bridge in Kampung Kual here.

To read more please go to:

http://www.thestar.com.my/news/story.asp?file=/2008/1/13/nation/19995904&sec=nation

------------------------------------------------------------------------------------------

Just for discussion purposes, here is a lay man’s way of analysing the impact of the recent sex scandal US recession against Malaysia:

According to the article, Malaysia is maintaining the forecast of a 6.5% growth in the GDP. But what determines the GDP growth?

In lay man term, GDP (or Gross Domestic Product) is the total market value of all final goods and services produced within a country in a given period of time (i.e. a year) (Reference made to Wikipedia. Click here for more on GDP). This total market value is driven by consumer consumption, government consumption, level of investments and net export of a country.

This then produce the formula of:

GDP = Consumer + Government + Investment + Net Export

In other words, the GDP will grow if there is an increase in spending of consumers (like Smiley and me and everyone else spending money on porn at 1-Utama shopping) together with the government spending money in projects (like road works), businesses investing in Malaysia (local and foreign companies starting new business) and Malaysia continue to increase export of goods to other countries. The increase in GDP could be driven individually by the factors highlighted above or as a combination of two or more factors.

Can Malaysia maintain a 6.5% GDP growth if there is a US recession?

In the article, despite US recession, Malaysia will thrive with healthy domestic consumption (increase in consumer spending). This is possible if there is no increase in oil price in Malaysia. If the government decides to maintain the oil price at current market price despite the price of crude oil has touched US$100 a barrel, there is a possibility that there is a healthy domestic consumption.

But what if the government reduces the subsidy and raises the oil price? My last experience was every business in town began to raise the prices of their products, starting out with food (which is the essentials) due to the increase in transportation prices. Now with the price increase but no change in your salary, will you spend more? Rationally you don’t and you will cut down on your spending. Now, imagine if everyone in the country did the same thing as what you’ve decided to do (that is to slow down in spending). I am not sure if the healthy domestic consumption would happen.

What about commodity prices and high crude oil price momentum? Surely this will drive the net export?

The price increases because everyone in the world wants the commodity (such as palm oil and rubber) and crude oil, particularly China. If there are lots of demand but not enough of supply, price will increase. Correct me if I am wrong but the press says that China is consuming most of these commodities and crude oil to support the growth in the country. China is consuming more because it is supporting its business which in turn is exporting most of the goods to US. So if you follow the link, Malaysia supply commodities to China and China supply goods to US. At the same time, majority of Malaysia’s export is going to US as well (electronic goods).

But if there is US recession, wouldn’t it mean that US will slow down in spending and import of goods from China and Malaysia will slow down?

If US’s spending began to slow down, surely there would be an impact on Malaysia’s net export. US will buy less from China and China would respond by buying less (commodities) from Malaysia. Even if China continue to buy commodities from Malaysia (since it has large population to support the economy), there would still be an impact in Malaysia’s net export given that we would be exporting less to US.

This leaves us with Investment and Government to push the GDP upwards. I have done enough of thinking so I will leave the rest of the analysis to you whether there is sufficient level of investments and government spending to maintain the GDP growth forecast.

Nevertheless, I am not an economist and I may be wrong about the analysis above since I am relying on recent press papers and simplistic economic model of cause and effect. This is just A-Level stuff without complex and fancy graphs. Maybe the Ministry of Finance has some other economic data which support its claim (which were not available to me for the purpose of this analysis).

Disclaimer: The content of this post is merely a simplistic description of the impact to Malaysia’s economy under a US recession scenario and is based on the writer’s personal opinion. Readers are advised to perform their own analysis and research. Bob’s World, the writer and its agent will not be responsible for any damages, losses, and liabilities arising from the reader’s adoption of the content of this article for whatever reason.