This morning I had a chat with an old friend, a veteran business and macro-economic writer about the implications of deflation and he explained that deflation is the opposite of inflation, where prices of goods and services decrease, instead of increase - the results of which for businesses are that manufacturers often end up very likely having to sell their goods at a loss, whilst property developers and speculators end up having to likely sell their properties at a loss.
I responded, adding that whilst the implications of deflation will no doubt delight consumers and property buyers for a while with bargains to be grabbed, however when businesses begin to cut back on costs in order to continue to make a profit, unemployment will likely rise, with retrenchment of staff staff or they close shop altogether, further adding to unemployment and then it won't be such great "fun" for consumers, with this situation possibly even leading to a vicious cycle of further deflation, more businesses closing down and even higher unemployment.
However, three economists believe that the effects of Malaysia's current deflation will not be all that bad, and one of them suggests that Malaysian consumers can help Malaysia overcome deflation by going out and spending a bit more but not too much, as Free Malaysia Today of 26 February 2019 reports.
Stay calm and keep spending just a bit more, economist says on deflation
Predeep Nambiar - February 26, 2019 12:04 PM
GEORGE TOWN: An economist has urged Malaysians to remain calm over recent reports of a deflation, following the drop in consumer price index (CPI) with rates reminiscent of the 2009 global financial crisis.
Ramon Navaratnam said the development was an "aberration" that would not last long, taking into account external factors.
Deflation or falling prices does not bode well for the economy as buyers put off purchases, thinking that prices of goods will go down. The end result is less spending which retards economic growth.
A moderate inflation number is good for the economy as it spurs investments and purchases.
Ramon said to say that deflation was good or bad at this stage was arguable, as when consumer prices go down, people might be encouraged to spend more again.
He said while it was natural to think that people might begin spending more, most Malaysians were caught in a bind.
"On one hand, we need to spend a bit more but not too much. On top of that, we have a debt problem, not critical but big enough.
"And we have a deficit to contend with, so we can't be spending too much either. It is a very tricky balance to maintain.
"This might be just an aberration. It is important not to be over-alarmed. We should stay alert and watch the developments closely," he told FMT.
Ramon said if deflation continues, counter-cyclical measures should be introduced to encourage spending. He said this was where the economic skills of policymakers could be put to good use.
"Hopefully, the Economic Action Council will know what to do, which is to strike a balance, short-term, medium-term or long-term."
Meanwhile, Universiti Sains Malaysia senior economics lecturer Law Chee Hong said the current deflation would likely go when the high base effect disappears.
According to Investopedia, base effect is the distortion in a monthly inflation figure that results from abnormally high or low levels of inflation in the same month a year ago.
A base effect can make it difficult to accurately assess inflation levels over time. It diminishes over time if inflation levels are relatively constant.
"In other words, there is no clear indication that the recently announced deflation suggests that Malaysia is heading towards a recession.
"The bigger risk for a recession at this moment is the possible trade war between China and the US, but the probability of this happening has reduced following recent positive developments," he said.
Law said if the core inflation index were to be observed, Malaysia had experienced inflation of 0.2% year-on-year in January, as per Department of Statistics data.
The core index excludes prices of goods which are volatile, such as food and energy-related items like fuel.
Law said moderate inflation was good for the economy as it would promote investment and consumption, that is, more buying. He said ideally, a stable inflation rate would be good for the country in the long run for higher production and consumption, compared to a volatile inflation rate.
Meanwhile, ING Asia economist Prakash Sakpal said Malaysia's deflation was not permanent and would be "short-lived" as it would return to inflation levels this quarter.
"Global oil prices are creeping upwards and will transmit into domestic fuel prices, but there is unlikely to be a significant pick-up in inflation until the goods and services tax impact moves out of the base by mid-2019.
"We see inflation rising to 2% in the second half of 2019, though the full-year average rate is likely to be shy of the central bank's 2.5-3.5% forecast for the year.
"It will take a significant thrust from either the demand or the supply side to hit the central bank's forecast, and neither of these scenarios is our base case," he said in an article on Think, ING's economic and financial analysis site.
Prakash said the negative CPI numbers were due to the cut in fuel prices, with the government likely unable to do much through monetary policies.
"A counter-argument to ease policy would be the lack of demand-side pressure as can be seen from the wage growth – manufacturing wage growth has been running around 10% year-on-year on the back of steady employment in the sector.
"We believe the central bank will see through the latest CPI data and leave policy on hold this year," he said.
Yesterday, the government dispelled any fear of deflation following the 0.7% year-on-year decline in the January 2019 CPI for the first time in 10 years.
Finance Minister Lim Guan Eng said this was supported by Malaysia's strong economic growth numbers, with the economy expanding by 4.7% in 2018 and likely to reach 4.9% this year.
He said the January CPI decline was not the result of any weakening in consumer demand. Instead, it was largely caused by supply factors in the form of cheaper input costs, specifically cheaper fuel, he said.
Bank Negara has said Malaysia does not face serious deflationary pressures. Headline inflation, which came in at 1% in 2018, is likely to average higher this year, the central bank said last week.
Well, let's see who turns our right.