Bigger arsenal of stimulus required

COUNTRIES adopting proactive strategies to boost their economies may require a larger arsenal to fight the possibly prolonged slowdown in trade, manufacturing and business investment globally.

Hit by continuous trade fights and deepening uncertainty, recession fears are back for the global economy, with some who consider it will not be as bad as in the 2008 financial crisis when interest rates were raised more aggressively.

The US Federal Reserve, which lowered rates 11 times from 6.5% in May, 2000, to 1.75% in December, 2001, started hiking rates from June, 2004, until the federal funds rate hit 5.25% by June, 2006.

The recent delay in imposing a part of the 10% tariffs on the remaining US$300bil of Chinese imports from Sept 1 to Dec 15, has only made an uncertain situation more unpredictable.

Vows of further retaliation from China, even as the United States spoke of “productive” trade talks, made markets more jittery.

The Fed, which lowered interest rates by 0.25% in July, also did not make things better for markets when it indicated there may not be any further cuts.

The US yield curve, which had been moving towards inversion, inverted last week; the yield on 10-year Treasuries went below the two-year rate.

Signalling that investors were better off lending money to the US over two rather than 10 years, this inversion is historically seen as a reliable indicator of recession.

In December 2005, two years before the financial crisis which was followed by a recession, this part of the yield curve had also inverted.

Taking fright, the Dow Jones Industrial Average plunged by 800 points last Wednesday, the fourth biggest drop since February and October last year when it fell by over 1,000 to 800 points.

US consumer sentiment fell to a seven-month low in August to 92.1 from 98.4 in July, according to The University of Michigan preliminary sentiment index, reflecting growing caution over the economy to which consumer spending contributes about 70%.

For now, the global downtrend is not as rapid or severe as in the 2008 financial crisis, but the impact of financial market volatility on real economies cannot be underestimated, said Nor Zahidi Alias, associate director, Economic Research Division, Malaysian Rating Corp.

Many countries are not taking any chances; government spending measures announced last week came hot on the heels of rate cuts in the previous week.

Thailand, which had just cut rates the earlier week, has planned a 316 billion baht (US$10.2bil) in loans and government spending to boost consumer spending and investment.

Indonesia has proposed a US$178bil budget which is expansive but targeted especially at human resources and education in “emerging skills” in new areas of technology.

Hong Kong, which is reeling from mass protests and facing the possibility of recession this quarter, has unveiled a HK$19.1bil (US$2.43bil) in measures for enterprises and households.

After a series of rate cuts by central banks earlier on, the most aggressive recently was the 0.5% cut in its official cash rate to alltime low of 1%, by New Zealand’s central bank.

India has slashed its repurchase rate at which the central bank lends to commercial banks, by 0.35% to 5.4%, the lowest in nine years, and the fourth reduction this year.

Thailand unexpectedly cut its key rate by 0.25% to 1.5%, for the first time in four years, on slowing growth and a strong currency.

There is room for further cuts, as indicated by some central banks.

One of the earliest in the region to cut rates in May, Malaysia has room for further cuts to its current overnight policy rate (OPR) of 3%.

“Every 0.25% cut in the OPR can boost real private consumption growth by 0.3 percentage point,’’ said Suhaimi Ilias, group chief economist, Maybank Investment Bank.

Besides the revival of mega projects, Budget 2020 for Malaysia is expected to have measures to, among other things, spur targeted private investment.

The concern is that the boost to the local economy may be limited, in view of its weaker fiscal position and reduced size of mega projects and hence, their margins.

“We are not as well-positioned as we were, before the 2008 recession,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

Factors cited include a lack of booming confidence, slumping world trade, weak property market, absence of growth corridors and political uncertainty.

Global recession, which can be triggered by a severe shock, must be tackled through fiscal and monetary policies to mitigate its depth and duration, even if recession cannot be avoided, according to Lee Heng Guie, executive director, Socio Economic Research Centre.

Columnist Yap Leng Kuen notes the next arena in the swift pace of trade fights: auto tariffs.