Summary by Alan Yang Gregory (Photo credit: jEd dC)
The global economic shock of 2020 was not caused by financial speculation or asset bubbles. The black-swan event was that led to it was instead a pandemic and, to control the spread of the virus, almost all countries have adopted a national lockdown policy, restricting international movement and prohibiting many economic activities.
The result of this unprecedented collective shutdown was revealed in the second quarter of 2020 when Malaysia’s GDP fell 17.1 percent year-on-year, setting a record for the worst quarter in history. This forced the central bank to revise its full-year GDP target from the original positive growth rate of 0.5 percent to a contraction of between 3.5 to 5.5 percent.
The ability to stage an economic rebound depends on Covid-19. Any recovery will depend not on its direction or intensity, but instead on when the epidemic can be completely eliminated. Instead of focussing on GDP, it is better to study the debt situation. With a healthy financial situation, anyone can survive the economic downturn.
But household debt is high, accounting for more than 80 percent of GDP. Malaysia’s unemployment rate soared to 5 percent in April, setting a new 30-year high. The job market in the next few months will definitely be bleak, and household financial problems will deepen. Another concern is the housing bubble – more than half of household debt is tied to mortgages.
The central bank will definitely cut interest rates further. If Malaysia is in a low interest rate environment in the next few years, it is conceivable that the banking and financial industries will be hit first. Can the financial system?
If the economy is to survive, there is no other way than wearing a mask, practicing social distancing and take preventive measures. Only when the epidemic has stabilized can economic affairs recover.