Stagflation – Beware!

 

By Tan Sri Ramon Navaratnam

The latest release of data by the Statistics Department raises alarm bells of possible stagflation ahead.

Stagflation generally implies slowing or stagnant growth and rising inflation. According to the latest statistics issued by the government’s Statistics Department, the industrial production index decreased by 5.1 per cent in May this year compared to May last year. In May, both exports and imports declined month–on-month by 4.7 per cent and 0.4 per cent.

These are dramatic declines and cannot be taken lightly.

The economic growth rates are therefore revised downward by the Malaysian Rating Corp (MARC) from the earlier optimistic estimate of 5.3 per cent for this year to an uncertain wider range of 4-5 per cent this year!

The earlier scepticism of official economic growth and inflation projections are now proving to be justified. We can now only hope that the situation will not deteriorate to a path leading to stagflation.

Unfortunately the global economic outlook does not appear encouraging either. The US economy, which is the biggest economy in the world, is also foundering. Its economy grew by only 1.9 per cent in the first quarter this year and about 1.5 per cent in the second quarter and about even less than three per cent for the whole of 2011 and 2012. The current US debt crisis is staggering!

In Europe the economic is as bad or even worse. With Greece, Spain and Portugal and Italy and other countries facing real economic decline and financial instability, and reinforced by the Japanese economic catastrophe, our export prospects can be adversely affected.

Now the fear of rising inflation is real. The Consumer Price Index has risen by three3 per cent in the last six months and at the higher rate of 3.5 per cent in June this year compared to June last year .

What is worse is that the CPI for food and non alcoholic beverages went up by 4.5 per cent for the first six months this year compared to the same period last year. This is very worrisome as we are talking about the poor and lower income groups having to pay so much more for their basic consumption of food and beverages.

So how will the poor cope with these rising prices? More importantly, what hope do the poor have that the government has a well conceived plan or a sound strategy to counter this likely prospect of stagflation.

I have no doubt that the government is aware of the serious social implications of low growth and high prices on the possibilities of social dissatisfaction and even some social unrest. It is thus sincerely hoped that the government will be more transparent and communicative with the public on these disruptive economic trends.

The government would need to inform the public soon, that it recognises the impending dangers of weaker employment opportunities and lower standards of living.

The government will also have to show that it has specific anti-stagflation strategy, to firmly address these socio-economic problems, to instil more hope and public confidence.

* Tan Sri Ramon Navaratnam is chairman, Centre of Public Policy Studies (CPPS).