With sluggish global growth, it is said that this will be the year the world is likely to experience an economic slump. We find out more about the dreaded downturn – what triggers it, what happens during one and whether Malaysia will be spared from it or not.
While some experts say it is part of the economic cycle, a recession is what every country fears most because the impact it brings can be devastating– making it something governments and policy makers strive to avoid.
Considering all that, you could easily think it’s the worst possible thing that could happen to an economy! And with all the global uncertainties, there’s been speculation that this will be the year the world – and Malaysia – slides into a recession.
But have you stopped to ask yourself: what is a recession, really?
To put it simply, a country is considered to be in a recession when its economy experiences a continuous decline in GDP (Gross Domestic Product) growth for a set period of time.
If that doesn’t make much sense, we don’t blame you. Here’s a breakdown:
GDP, being ‘a monetary measure of the market value of all the final goods and services produced’, serves as the main reference point for how well an economy – and by extension, the country – is doing. A growing GDP is a good sign. The reverse, less so.
So back to the recession. The International Monetary Fund (IMF), an organisation of 189 countries whose responsibilities include keeping track of the global economy, acknowledges that a recession has no official definition, but is generally recognised as ‘a period of decline in economic activity’.
And since GDP growth is a good measure of this, a country can be regarded as experiencing a recession when its GDP growth declines over a period of time— specifically, for two business quarters, or six months.
DID YOU KNOW? The term ‘recession’ comes from the word ‘recede’, which means to withdraw or go backwards.
But determining a recession isn’t quite like making a medical diagnosis: meeting a threshold of symptoms isn’t enough. It can sometimes take up to a year for a recession to be officially diagnosed, which is what happened with the Great Recession and subsequent Global Financial Crisis that started in 2007 but was not formally announced until 2009.
Furthermore, recessions can be caused by a number of things, making them even harder to predict. If you think of economic activity as encompassing the way a country earns and spends its money, you’ll notice that there are numerous ways to a slowdown. Anything from a financial crisis, policy decisions to an external trade shock or even the bursting of an economic bubble can trigger this.
For example, the bursting of the Dotcom bubble was responsible for the 2000 U.S. recession , while Hong Kong’s last recession occurred in 2003 when the Severe Acute Respiratory Syndrome (SARS) virus outbreak shattered the tourism industry and brought business travel to a halt.
But regardless of what leads to a recession, what happens during one is pretty consistent. According to the IMF, a recession can lead to higher unemployment rates, financial market turmoil, lower industrial production and investment, a drop in inflation, a decrease in house and equity values… basically, nothing good for businesses and people like us.
With all that considered, what’s happening now? Why has there been so much talk of a global recession?
In recent years, the constant uncertainty with the on-going U.S.-China trade war and Brexit deliberations has thrown international trade and finance into chaos. Political unrest can also lead to a state of recession, like what happened in Hong Kong last year.
What about Malaysia?
With the world in such a state, it’s natural to wonder what it all means for Malaysia as well. After all, when a recession hits large developed economies like China and the U.S., its effects can trickle down to smaller ones — like us.
Thankfully, there’s not much cause for concern this time around. Despite the global situation, Malaysia is doing considerably well.
In fact, Bank Negara Malaysia (BNM) announced that our economy grew by 4.9 per cent in the second quarter of 2019 — better than it did in the previous quarter and year. BNM Governor, Datuk Nor Shamsiah Mohd Yunus, credits this resilient growth to higher net exports, increased household spending and private investment, as reported by The Asean Post. The World Bank is in agreement as well: they maintained Malaysia’s economic growth at a healthy 4.6 per cent in 2019.
And good news: 2020 should be no different!
In the 2020 Budget speech delivered in October 2019, the Ministry of Finance released their projection for this year’s GDP growth to be 4.8 per cent. Projections by the World Bank, the IMF and most economists may be slightly lower, but still situate us firmly above four per cent. Why? Because despite the gloomy global outlook, our domestic businesses are still investing and hiring, and everyday people, like you and me, are still continuing to spend our money on everything from holidays to bubble tea.
So is Malaysia headed for a recession?
No, barring some rather unlikely shocks.
But if a recession were to happen, what should you do?
The most important thing you can do is to avoid getting deeper into future debt— a recession is not the best time to take out a big high-interest loan. Try to pay off your existing debts, keep investing as diversely as possible and keep your overheads (like bills and other necessary spending) low.
“If you’re lucky and planned it right, you can even prosper during recessions,” says Suraya Zainuddin, founder of personal finance website Ringgit Oh Ringgit. “Some people have accumulated enough cash that they actually wait for the recession to start to go on a buying spree. They snap up investments like properties and shares that other people are desperately selling at reduced prices. Later, when the economy recovers, they sell them back at a good profit.”
Finally, nothing – including a recession – lasts forever.
“It’s important to remember that the economy isn’t dead, it’s just slow,” Suraya explains. “The safest way to cruise through a recession – which will end, if we follow the stages of economic cycles – is to equip ourselves with employable skills so that we can still earn money.”
So take advantage of the slow pace to pick up a new skill that’ll make you even more desirable when the economy bounces back!