When it comes to a heavy topic like this, the biggest challenge is to make it less boring. After all, it’s quite a dry subject but no one can dispute its importance when it comes to critical period like this point in time. Therefore you hear people talk about it everyday simply because we see the word “recession” everyday in the media. But what kind of recession? Is it different this time? What other things are brewing? Let me try to provide some perspectives in the most layman manner I can.

Recession happens when there is a contraction of gross domestic product (GDP), a measure of all the economic output generated. The fact that you produce and sell a loaf of bread tomorrow for RM10 means you contribute an equivalent amount to the GDP. I have no doubt this number will go down because almost the whole population stay at home for two months and produce nothing except probably babies (which unfortunately are not included in GDP number). Then you see companies closing down on an unprecedented scale and the job market is getting hit really badly. I’m lazy to elaborate this, just read the newspaper.

What I do want to talk about is the specific factors that affect our GDP and what kind of recession we are going to face (in my humble opinion). First of all, GDP is made up of private consumption, investments, government spending and net export. By looking at each component will give us a clearer perspective on how things will progress going forward.

Other than essential products and services, private consumption has certainly gone down because most people are in lockdown. There is no way it will recover immediately even after the lockdown is lifted because sentiment is at all time low. With job security at risk, most people will just defer their non-essential spending and focus on saving money for the rainy days. Just google and read the news with the title “Malaysia vehicle sales volume plunges 59% year-on-year in March” and you will know what I mean.

Investment in the corporate sector will go down the same route for pretty much the same reasons. Corporate executives make investment decisions based on their expectation of demand, availability of fund, cost of capital etc. Right now, what I can anticipate is a drastic drop in demand coupled with more stringent lending by the bank in light of the impending bad debts. Despite the announcement of a special relief fund to assist businesses, banks generally avoid high risk sectors like hotels and entertainment industry.

Some companies are even finding ways to unwind their mergers and acquisition deals entered into before the Covid-19 crisis unfolded. For example, Boeing is trying to walk away from a US$4bil deal to acquire a Brazilian jet business called Embraer. On the real estate front, Anbang, the Chinese insurer is suing South Korean asset manager Mirae who is trying to renegotiate the deal to buy 15 US luxury hotels, arguing the hotels had lost value during the coronavirus shutdowns. Won’t our local businesses go through the same mental exercise?

The right thing to do now is for central bank to flood the market with liquidity and government to invest heavily in infrastructures or any other sectors with high multiplier effects. Just look around the world and you will notice that central banks are busy printing money and governments never hesitate to introduce stimulus package at enormous scale. Unfortunately at this point in time, our government suffer from a triple whammy – political instability, low oil price and the loss of goods and service tax (GST).

While we can’t control oil price, the political upheavals and loss of GST are self-inflicted. I’m a big supporter of GST as it’s fair and efficient. With GST, we probably don’t have to squeeze Petronas so hard to the point of choking it. It’s sad that good things succumb to politics. We have no choice but to push up the fiscal deficit even though the current stimulus package is expected to increase the deficit to 6% of GDP.

What about export?

In my opinion, the damage caused by Covid-19 in other countries is worse than us. Again, I don’t need to elaborate, just read the international news. Look at which industries on government life support and the amount of business closures. Or just look at how stressful Donald Trump looks nowadays and the amount of blames he unleashed on others.

With that, the sentiment on our export sector is at all time low, except for very few industries (glove manufacturing for example). With the understanding that major economies are in recession, how would export-oriented businesses behave? Talking about sentiment, some of our public listed furniture exporters are trading at 4X PE and 0.5 book value right now. You tell me what you think.

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Again, I want to emphasise that it’s crucial to address the elephant in the room now – GOVERNMENT’S BEHAVIOUR. It desperately needs to restore political stability and stimulate the economy via effective government spending to restore market confidence. This will directly boost private consumption and investments. Business leaders generally know that things will recover but they need to be assured that we are on the right path before taking any actions.

The thing about consumption and investment is that both are interdependent and each individual’s habit directly affects the outcome. The more you refuse to spend or invest, the less economic activities generated and it all becomes a self-fulfilling prophecy. Confidence is the key and most policy makes try to tackle this but with mixed result because it’s inherently difficult to manage the psychology of millions of people.

Taking an example from the Japanese asset price bubble in the 1980s, the balance sheet of the Japanese private sector switched from rapid expansion to rapid contraction because of the risk aversion. When the private sector received money, they paid down their debt and save the money instead of investing for business expansion because they could not really visualise the path towards recovery. This effectively caused a large-scale contraction in the economy similar to the 1930s Great Depression in the US. What I’m afraid is we may enter into this so-called balance sheet recession due to the erosion of market confidence, which is very hard to get out of. Once economic hardship becomes a reality, things will just spiral down with more risk aversion kicking in. It’s just like once you get cheated, it’s difficult to place your trust in someone again.

At the moment, we are having a very unstable government and the political infighting have no sign of abating. Several large scale infrastructures are put on the back burner and there is no clear direction on certain policies. Businesses are very reluctant to make major decisions without political certainty and this has been like that even before the recent political coup. When I went to every single business function before this, most conversations started with one common topic – who will be the next Prime Minister. In a more matured economy like the United Kingdom for example, you would expect the continuity of certain important policies no matter who wins the election and people generally have faith in the public institutions. Malaysia is an entirely different animal because a different government could mean a different tax regime, different people heading the public institutions and the rise (or fall) of politically connected businesses.

During the 1997 financial crisis, no matter how bad things were, we had a stable government with clear leadership. Without debating the merits of capital control and other policies, the general public at least had a clear idea where they were heading and hence decisions could be made. Right now, I don’t even know if the current government can survive the Covid-19 crisis because it is still busy making political appointments to ensure its survival. To make things worse, you can still see our politicians making a mockery of themselves by saying stupid things and behaving in a more ridiculous manner than Donald Trump.

Are we going to escape this coming recession unscathed? No way.

How fast is the recovery? I don’t know but I think it largely depends on how our government behaves. Let’s observe and you may enlighten me.