Growth Takes Priority!

As the global economy decelerating at the pace faster-than-expected and domestic demand is just not ready to take up the slack. As such, I think no one should blame central banks to shift their attention from inflation to downside risks for the economy. More and more central banks are acknowledging that downside risks are materializing.

With commodity prices in correction mode, we see scope for Bank Negara Malaysia (BNM) to possibly cut rate, if situation worsens further from here, as inflation falls back to target by mid-2009. Judging from the Monetary Policy statement, I believe that BNM does not see reasons to respond to the rise in inflation by hiking rates.

As we are beginning to see, slower exports reduce income for households and businesses and this translates to slower domestic demand as well. US consumers face one of the most challenging economic environments in decades, with a sluggish employment market, high energy prices and tightening credit conditions. We are in a very confusing atmosphere.

In Malaysia, sluggish income growth makes it much more difficult for consumers to deal with high energy prices and consumers have responded by driving less and by increasingly trading in big engine machines, MPVs for smaller, more fuel-efficient cars like Kancil and Kelisa.

Benjamin Graham says that the stock market is a voting machine in the short run and a weighing machine in the long run. Trailing as reported 12-month Malaysian corporate profits peaked in the 2Q07 and as the economy began to run into trouble, nearly every major forecast are taking a major revision. Stocks are in a bear market. After peaking above $1,000/oz, gold is back below $800. Silver has declined by 40% in just five months. The USD/MYR pairing rose past the 3.340 mark, though this was partly due to USD rebounds. Industrial production grew at the slowest pace in 10 months in June08 as it rose 2%yoy.

According to the National Credit Counseling and Debt Management Agency CEO Mohamed Akwal, most of 7,4732 people who sough help from 5 June to 12 August cited the sharp rise in fuel and food prices as ‘the double blow that turned their financial stability haywire’. What is of concern is that most of those affected are from a vulnerable group of young families with net monthly income below RM3,000 respectively. The Malaysian Economic Council, which chaired by PM Abdullah Badawi, is entertaining the thought that the current crisis could be more serious than the recent one in the 1997/98.

I continue to believe that by the end of this bear market, money – what or whichever of it survives – will be king. With stocks and commodities falling and the credit market contracting, it seems that deflationary force may have finally taken hold. But until the KLCI fall below 950 level, I cannot be sure of it. My sense is that we probably are not even past the halfway point of this recession. It would be very tough for me to buy in that we have reached anything close to a fundamental low. Until this direction changes, plenty of economic contraction is lying ahead of us.