Is the U.S. economy sliding into recession, and will it impact on Malaysia in the immediate future?

By Roland Lee, 3 May 2008

1. RECENT U.S. DATA
Remember that this year is Presidential Election Year in America and the election is set for November, 2008. As can be expected, the Bush Administration is doing everything possible to avert a recession. Being a Repblican himself, President Bush would like to favour a Republican candidate to win the next presidency post.

Apart from numerous significant interest cuts by the Feds, the Bush administration pushed through a ‘stimulus package’ worth US$150 Billion in January 2008 as part of an emergency rescue package centered on tax rebates and business tax cuts as well as increases in unemployment benefits and food stamps. The impact of the stimulus package is expected to take effect as from May 2008.

However there is always the growing probability of recession given the major issues currently facing the U.S. which includes the following:-
· A deepening housing recession
· Credit tightening
· High energy prices
· Plunging consumer confidence

As per announcement last week, the GDP growth for the first quarter is +0.6%. The positiveness of the GDP number was assisted by higher inventory numbers. Other significant announcement received this week are:-

· Initial jobless claims for the week ending April 26, 2008 totalled 380,000. The concensus estimate pegged jobless claims at 365,000. Though reported claims exceeded expectations, do note that the average jobless claims did not breech levels often associated with a recession.
· Personal spending continues to rise, as seen in the Personal Consumption Expenditure announced on 1 May 2008. It showed an increase of 0.4% in March which is more than the expected 0.2% increase.

. The stockmarket showed a positive increase with the S&P 500 index closing at 1409 which is a record as the index has not risen above 1400 since January 2008.

. Crude oil has fallen down to US$112 per barrel compared to US$119 per barrel last week.

The current outlook is for continued weak but positive growth supported by consumer spending, export growth and government spending. The stockmarket is anticipated to perform much better in the 4th quarter in the rundown to the U.S.Presidential elections. Some analysts even expect a mini rally of the stockmarket in the 4th quarter.

2. IMPACT ON MALAYSIA
The impact of a slowdown in the US economy is already evident in Malaysia. It is reported that direct exports to the US has significantly slowed down as well as the indirect exports of Malaysian exports to the U.S. via Singapore and HK. The impact of the US slowdown will also be seen in the growth of trade between developed countries and the US. All in all, Malaysia can expect to see a reduction in expatriate workers being based in Malaysia for the foreseeable future.

However, the implementation of projects delineated within the 9th Malaysia Plan and the anticipated spread of money into the economy via the multiplier effect, Malaysia should be able to mitigate a global economic downturn expected in 2008 and 2009.

Projects such as the Iskandar Region Development Authority in Johore, the second bridge and monorail for Penang, the upgrading of the Kota Kinabalu International Airport (projected to be the second low cost hub for Malaysia), additional runway and satellite buildings for KLIA, modernizing agriculture farming, agricultural irrigation schemes and the double tracking at selected priority stretches, should assist Malaysia make up the deficit of foreign investments into the country. The expected government capital expenditure within this 9th Malaysia Plan coupled with the fact of being a net crude oil exporter, probably explains why the revised GDP growth for Malaysia in 2008 stands at a +5.5% instead of a dramatic reduction in the projection from 6.5% last year.