So what if we go into a recession?

A real assessment of the ground is imperative for the good battle. But if the situation is painted as hopeless, confidence can evaporate and the battle is lost even before it is fought.

QUESTION TIME WITH P. GUNASEGARAM, The Star

 

FROM what Deputy Prime Minister and Finance Minister Datuk Seri Najib Tun Razak said on Tuesday, two things are crystal clear.

One, if there were no stimulus package, there definitely will be a recession, a situation where the economy contracts for at least two successive quarters.

Two, even with the RM60bil package, it is not at all certain that we will be able to evade a recession.

Explaining the underlying pessimism behind his remarks, he gave a range as a forecast for the economy: it could contract or expand by 1%, or land anywhere within the narrow range.

That implies that, without the RM60bil package, the economy would slip into quite heavy recession this year of, say, as much as 5%.

That can still happen, depending on how badly the rest of the world is affected and whether export markets recover.

Or it may not. If stimulus packages around the world begin to, well, stimulate, there could well be recovery in demand for goods manufactured in Asia, commodity prices may increase again and income may start to flow like it used to. That may be a big if.

The problem is everyone knows how bad things are, but nobody knows how long it will take to recover. And the greater the uncertainty, the more will people squirrel away money so that they are better protected if the bad times are prolonged.

And here’s the paradox. While thrift may be the individual reaction to uncertainty, and is often a laudable quality, if everyone reacts to declining growth by keeping their money in banks and under their pillows in a manner of speaking, demand for goods and services will fall.

That pushes economic growth down even further, a situation that considerably worsens an already bad situation. The more panic sets in, the more confidence evaporates and the less likely are people to spend.

In the meantime, banks will get cautious in their lending and would rather place low-cost deposits for

a small margin of profit on the inter-bank market, instead of what

they perceive as high-risk lending, sometimes even to their best customers.

Even as the Government steps in to spend, provides guarantees for lending, and cushions the impact on industries badly affected in an attempt to prop up a sagging economy, it is already hampered by a cut in spending all-round, some of it induced by a panic reaction to situations overseas.

Yes, we may well head into a recession. So what? Unless it is massive and incomes are considerably constricted, we have the savings to see us through this crisis, provided we make the right moves, without inducing general panic.

This is not to understate the real suffering of those who have lost jobs in sectors such as electronics where demand has fallen off a cliff in line with the US economy. But not all sectors are as badly affected.

Look at it this way. If the economy contracts 5%, incomes are likely to contract by a similar amount on average if prices don’t change much. If a person earns RM2,000 a month, would it be disaster if he lost RM100 in income?

No. But it would be if he lost his job, and it would be a national disaster if many people lose their jobs. That is the situation in countries which have faced the brunt of the global crisis such as the US, where unemployment is nudging the 10% mark.

The important thing is to help sectors where jobs may be lost, such as the electronics and electrical sector, by shifting those laid off to other sectors such as services, which may yet be vibrant, and to bring about conditions which will permit that.

If jobs can be preserved by a judicious combination of making shifts easier and controlling foreign migrant labour in some areas such as services (think restaurants and shops), it may well be possible to preserve much of employment.

Government figures indicate unemployment rising only slightly to 4.5% this year from under 3.8% previously.

The next thing is to preserve existing jobs and incomes. The message that must go out to employers is that they must NOT take advantage of the situation to cut jobs or incomes.

If they are still making decent profits, they have no business doing that. They are of course perfectly justified in cutting superfluous expenditure.

If jobs are preserved, incomes are preserved. And if incomes remain largely intact, then the spending will continue at still healthy levels even if they moderate somewhat with all the bad news around the place.

The important thing is to leverage on the strong points that we already have. Unlike the US, we have a high savings rate, banks are in good health and are able to lend, and many companies are still making profits, although they are lower.

There is plenty of money in the system, we don’t need foreign funds, and foreign exchange reserves are still near their record highs and are enough to sustain more than seven months of imports, a very healthy position to be in.

While exports have declined, so have much of the imports of intermediate goods associated with these exports, and we still maintain a healthy surplus in the overall trade account. This situation is likely to persist with still healthy demand for palm oil and oil. On a net basis, money is still coming into the country.

Okay, we need to tighten our belts. But did we not put enough away as savings in anticipation of bad times? Now is the time to spend some of these savings so that we are not deprived of what we have been used to.

So we may go into a recession. But if we make the right moves, bearing in mind the need to remain humane and help those who may lose jobs and provide them with some cushion, we will come out of it soon enough.

Let’s not fear recession too much. We can deal with it if it comes.

P. Gunasegaram is managing editor at The Star. He has not cut back on his spending.