Consumer spending holds key

WHEN Malaysia faced an economic downturn in the late 1990s as a result of the Asian financial crisis, then Prime Minister Datuk Seri Dr Mahathir Mohamad (now Tun) urged Malaysian consumers not to pull back their spending so as to help the country get out of recession.

And even now, as the country faces another challenging phase caused by the global financial crisis, economists say Malaysian consumers still hold the key to sustaining the country’s economic growth.

In fact, consumer spending is the key solution to the current economic turmoil in which the world is embroiled.

That explains why the governments of various countries have been introducing measures that promote consumer spending.

For instance, Australia and Taiwan have resorted to using cash handouts to encourage their consumers to spend. While the former targets groups most likely to spend immediately, Taiwan is providing vouchers to all its citizens.

China, on the other hand, has adopted measures that directly support household budgets such as providing education and health assistance to rural households.

The Malaysian government is also seen as supporting local household budgets, with one of the initiatives under its domestic stimulus plan being the option for consumers to reduce their monthly EPF contributions from 11% to 8%.

Consumer spending is seen as an important engine of growth because it encourages investments by businesses, and business expansion creates employment opportunities.

But when there is an accelerated pullback of consumer spending, businesses would be unwilling to invest, and some would scale back their operations.

TA Securities head of research Kaladher Govindan in his recent report said the performance of equity markets around the world and the global economy in 2009 hinges on a single factor – consumer spending – adding that the path to economic recovery would not be visible as long as people do not start spending. But the question is whether they are willing to spend in these times of uncertainty. The deteriorating global economic conditions have already depressed consumer sentiment.

And given the weak labour market conditions, where job security is at stake, households tend to tighten their purses, while some consumers would scale back spending because of a negative wealth effect resulting from falling asset prices. Moody’s recently said in its report that it expected private consumption in the Asia-Pacific region to either grow modestly or contract this year.

The financial research company added that it was unclear about the effectiveness of the measures introduced by the respective governments to encourage consumer spending as households may add to their savings instead of spending the extra money that they gain.

In Malaysia, where private consumption accounts for about 50% of the gross domestic product, signs of a weakening consumer spending have already emerged since the past few months as reflected in the sales of passenger cars.

According to the Malaysian Automotive Association, sales of passenger cars had declined a further 9.5% year-on-year to 36,254 units last November after contracting 14.7% y-o-y in the previous month. (Sales of passenger cars are one of the major indicators of private consumption in the country.)

Consumer sentiment remains dampened as indicated by the consumer sentiment index from the Malaysian Institute of Economic Research – 70.6 for the second quarter of last year and 88.9 for the third quarter.

The consumer sentiment index is expected to remain below the threshold level of 100 points in the coming quarters, especially since there have been announcements of staff retrenchment mostly in the electronics industry. For instance, the closure of the Western Digital plant in Sarawak is expected to affect 1,500 workers.

Against this backdrop, analysts are expecting the Government to announce additional fiscal stimulus in the first quarter to complement its easing monetary policy.

This expectation is further strengthened by the announcement by Deputy Prime Minister Datuk Seri Najib Razak over the week that the Government was prepared to introduce additional stimulus measures if and when the need arose.

Meanwhile, Bank Negara over the week announced that Malaysia’s current account surplus for the third quarter of 2008 stood at RM38.7bil, representing an increase of 4.5% or RM1.7bil from the previous quarter.

The central bank attributes the increase in the current account surplus to lower net payment on income and higher surplus on its goods accounts, which have offset the deficit in its services account and the higher leakage on current transfers.

The Star- Cecilia Kok