Coronavirus Recession 2020 vs Global Financial Crisis 2008
The Coronavirus Recession 2020 looms…
The current Pandemic sweeping across the globe looks to be getting under control in Malaysia as it is in most other countries across the world (with the exception of a few).
The new government wasted little time to take a very stern approach in handling the situation as soon as they discovered that many people had contracted the disease at a mass Islamic gathering that took place in late February.
The number of new cases looks to have stabilized and the curve has indeed, been flattened.
As we dive back into business as usual now that the MCO has ended, is it going to be business as usual?
I know it will be back to business… but whether it will be just as usual, is up for debate.
The financial heavyweights have put in their views and nobody is even pretending that we are not diving head first into a recession anymore.
We are entering the Coronavirus Recession 2020. (It even has its own Wikipedia page entry) – https://en.wikipedia.org/wiki/Coronavirus_recession
It’s been a long time since Malaysia and the rest of the world has faced markets like these and perhaps many of us were either too young to remember what happened before or have forgotten altogether.
For those who fall into one of those categories, let’s take a trip down memory lane and see what were some of the impacts and actions taken during Recession 2008 and compare them to Coronavirus Recession 2020.
Average GDP growth was 5.9% in the first 9 months of 2008 and then proceeded to fall to -0.3% the following year, representing the first-time growth in the country entered the negative zone since 2001.
If we look at what has happened so far in this coronavirus recession 2020, Malaysia’s GDP grew at only 0.7% in the first quarter of 2020 from 3.6% in the fourth quarter of 2019 (pre-covid crisis). This is the lowest quarterly growth recorded since the third quarter of 2009 at -1.1 per cent.
It seems quite likely that we are yet to see the full effects on GDP growth, and this coincides with Bank Negara’s projections that have GDP growth for 2020 between -2% and 0.5%.
Housing Loan Approvals
Housing loan approval rates bounced between 54 – 59% during the crisis in 2008 and 2009, down from a high of 70% in 2006. Prior to the MCO, approval rates were at 72.1% which is equivalent to the highs of 2006 before the Global Financial Crisis hit.
We’re in a slightly different situation now whereas during that period, the average number of unsold residential properties was roughly 80,000 units, the current number is over 177,200 units. In contrast to this, Household Debt to GDP Ratio is up from 72% in 2009 to 82% in end 2019.
We have a double the amount of unsold properties and higher debt per household. If things were to follow suit as they did before, we are going to expect more stringent measures by the banks which will mean a decrease in the loan approval rate.
It’s important to remember here though, that we do have 32 Million Malaysians compared to just 28 Million in 2009, which is another 4 million people.
I do NOT believe however, that this 4 million more people is enough to absorb the current property oversupply.
If this larger amount of people were to have bought up the properties, they would have already done so – people tend to spend less and take on less debt during times of uncertainty.
We can only wait and see if the Government will continue to tighten up lending as they did in 2009 or if they have plans to further stimulate the economy through more relaxed lending measures.
Retrenchments in Malaysia seemed to be relatively low following the 2008 financial crisis with unemployment rates increasing to 4% from 3.1% in the fourth quarter of 2008. It then dropped by 0.4% to 3.6% by the second quarter of 2009 – recovering just as export markets did.
This increase of 0.9% represented about 40,000 workers.
Current unemployment numbers are showing that in March of this year, the unemployment rate increased to 3.9% (a 10-year high), which is almost identical to what the numbers looked like back then.
This time the increase however is more than double of that of 2008 with about 89,000 workers being retrenched.
Can we then expect the rates to go down again returning back to previous levels by the Q4 2020?
Or will it be more difficult seeing as how the actual number of workers out of a job is that much larger?
In November of 2008, the government provided fiscal support in order to boost the economy through 2 separate stimulus packages, the first amounting to RM7 billion which was targeted mainly at with a high and immediate exponential impact on the economy which included projects such as low-med cost housing development, upgrading of government developments, roads, schools, public transport and the development of an investment fund.
A second stimulus package was then implemented in March 2009 amounting to RM60 billion was then implemented as the first one was far criticized as being far too small compared to the impact of the economic downturn.
This much larger sum was used for fiscal injection (Not sure what kind of investments exactly), private loans and bonds, government investment (funds for Khazanah Nasional), private finance initiatives and off budget projects and tax incentives.
It also needs to be noted that according to the Treasury website, that the implementation of these two economic packages was very slow with only a fraction (~30% or less) of the amount stated actually being disbursed.
Compared to that of the Covid-19 financial stimulus, the government has allocated a total of RM315 billion which were part of 4 separate stimulus packages the first being announced on 27 February 2020 and the latest being announced on 5 June 2020.
This time the stimulus packages were much more comprehensive and focused on relief for people and businesses from every level of society.
A breakdown on the 2020 stimulus packages can be viewed here – https://news.bloombergtax.com/daily-tax-report-international/insight-malaysias-economic-stimulus-package-2020-tax-measures and here – https://www.straitstimes.com/asia/se-asia/coronavirus-malaysia-unveils-s114b-stimulus-package-amid-rising-unemployment.
Exports of manufactured goods from Malaysia declined by 20% in the fourth quarter of 2008 with palm oil exports and crude oil exports (Malaysia’s largest commodity exports) dropping by about 32% over the same period.
What is interesting to note here however, is that as quickly as the decline was, the recovery was just as fast, with rising on a month to month basis by more than 13% by March 2009.
In just 6 months things had rebounded back up from their lows. Experts attributed this rapid recovery to the massive fiscal and monetary programs that pumped in huge amounts of money into the economy by governments across the globe.
Seeing as how the fiscal and monetary injections have been much more significant this time round, can we hope to expect a similar speedy recovery?
Or is the worst yet to come?
Bank interests’ rates or the banks overnight policy rates (OPR) were reduced by a total of 150 basis points between November 2008 and February 2009 to 2%.
In this current coronavirus recession 2020 however, the rates have been reduced four times this year for a total of 125 basis points so far, bringing the OPR down to a record low of 1.75% with rates expected to be brought down a 5th time, by another 25 basis points in September later this year.
This is quite a change from the interest rate hike we had in 2018.
Will this be enough to help prevent people from saving and encourage people to take more loans?
Personally, I feel that we are yet to feel the full brunt of the Coronavirus Recession 2020.
We are yet to see what will happen to business owners and property owners once the moratorium period ends and they will have to resume covering their property loan repayments.
It is likely that many more businesses will close, and unemployment figures will rise which will lead to lower GDP, higher default rates and increased tightening of lending.
Or perhaps, things bounce back up as quickly as they have come down?
Interesting times are ahead of us, and in such times come equally interesting opportunities.
Let’s keep all our eyes and ears open so we can come out of this Coronavirus Recession 2020 unscathed and possibly even better than before.