Markerts mired in the economy

BUSINESSMEN are bracing for a downturn next year, with many expecting business to be much slower than usual after Chinese New Year.

Economists expect economic growth to contract by about 50% next year compared with this year, while analysts are forecasting lower corporate earnings.

The Year of the Ox, which starts on Jan 26 on the Chinese calendar, looks like a year when most will have to slog at their work.

Amid the gloom, optimists among investors hope the US recession will come to a close by the end of next year, and as the stock market attempts to trade about six months ahead of the economy, it may bottom in mid-year.

Optimists have the market recovery of 1986 on their side. The bear market of the 1980s occurred in 1985 and 1986, both years when Malaysia’s nominal gross domestic product contracted, with 1986 seeing the more severe contraction. Yet, the market did not fall through the floor for the whole of that year.

In fact, it had hit bottom by May from which point, the Kuala Lumpur Composite Index (KLCI) rose about 40% at the end of 1986. From there, the KLCI ran all the way, by a further 80%, until the 1987 October crash.

In the more recent financial crisis, the market also took off, in September 1998, while the country was still in recession.

There is no consensus yet as to when the relentless recession in the US might retreat – there are optimists who see the recession ending next year and pessimists who do not see that happening till 2010.

The market has a fairly good record of efficiency – it seems able to sense when an economy in recession will soon recover.

Consumer speding shrivels

THERE is no sign yet when one of the key indicators for an economic recovery in the US will show up positive.

Data on consumer spending in most of the developed countries continue to deteriorate.

During the week, the US reported that sale of new homes in November was worse than any other month this year, in fact, it was worse than in any month in nearly 18 years.

It was also reported that disappointing retail sales in the US are likely to show that this December will be one of the worst holiday shopping seasons on record, while auto sales had plunged 37% in November. This is also the pattern of retail sales in Europe and Japan.

The US economy, an unusual one which grows by consumer spending, will not stabilise until consumers do not hold back their shopping even more.

The recession in the developed countries has caused all manner of economic activity to plummet – exports from Asia, commodity prices and transport movements.

Everyone knows that recessions recur through the years regardless of what governments do to prevent them – they can only try to make it less painful or prolonged.

It is also known that in time, recessions will pass, after all the excesses have been spent. It remains to be seen the extent to which consumer spending will recover in the US, but if consumers are burdened with debts and can’t spend as they did in the good years, the recovery will be a weak one.

Spending in Mexico

MEXICO and Malaysia have something in common – their people like spicy food.

They are also both dependent on oil revenue in their government budgets.

Oil experts forecast that Mexico will no longer be exporting oil by the end of next year.

Considering that Mexico has been one of the world’s biggest oil exporters, it must be pumping oil massively and consuming a lot of it domestically.

Like Malaysia, Mexico’s government relies on oil revenue for about 40% of its budget. That’s a very heavy dependence.

Several articles were published on websites last week on American concerns of economic and political instability south of the border when the Mexican government is deprived of surplus oil revenue.

That’s an experience for Malaysia to watch although its reserves for oil and gas should last longer than Mexico’s.

It is not unusual for countries to turn from oil exporter to importer. Indonesia is an example, having become an importer in recent years.

Different commodity-exporting countries maintain their own policies. Norway, the world’s third largest oil exporter, keeps most of its oil revenue in fixed deposits.

Chile also has a prudent policy in its export revenue of copper, its principal commodity. It has US$25bil in its sovereign wealth fund that was accumulated mainly when copper prices were high. That now stands the economy in good stead at a time of global crisis.

>C.S. Tan is an associate editor of The Star. He thinks everyone, including governments, should save for rainy days. He also hopes companies will not be too unkind to employees next year.