[1802] Of looking at the wrong barometer

The Malaysia Deposit Insurance Corporation sure does take its job seriously. Amid news of bank runs, financial meltdowns, recession abroad and the spectre of — heaven forbid — depression in the United States, the corporation or PIDM is going all out to inform the public that their savings are insured up to a certain level. It is great that the PIDM is taking the initiative to assure savers but I wonder how justified is it for savers and the public in general to take such a negative perspective of the local economy.

I certainly do not expect a bank run to occur in Malaysia. To expect otherwise just because there are bank run in other countries seems excessively pessimistic. The reason is that the economic circumstances in countries where bank runs have occurred in the past months are different from that in Malaysia despite the fact that the world economy is more integrated than ever before.

But then again, a bank run is usually about a crisis of confidence and rarely about the soundness of a bank. With doomsayers and conspiracy theorists working overtime all over to undermine public confidence, maybe explaining to the public the benefits of savings insurance is not a bad idea after all.

Perhaps, especially so when even the latest data released by the Merdeka Centre showed that “economic issues” is among the top concerns of Malaysians. With the stock market not doing too good either, the headlines in the business section typically play an unhappy tune.

Despite the concerns, yet, looking at various economic indicators, the Malaysian real economy seems to be doing okay. It is not doing great but the sky is not falling either.

One of the few things which may be helpful in judging the state of the economy is to watch for the yield curve of Malaysian government bonds.

An inverted yield curve could signal an economic slowdown because a yield curve in a way measures the expected economic environment in the future. A rising yield curve may indicate better expected returns in the future while an inverted curve may indicate worsening expected returns in the future.

A brief check shows that the yield curve for Malaysian government bonds is healthily normal. The yield for a three-year bond is over 1 per cent lower than that of 20-year bond. Suffice to say, the future does not look too gloomy from this perspective.

Meanwhile, the consumer price index is expected to tatter the further we go into the future. At the same time, core inflation remains relatively low. The reason Bank Negara did not increase the overnight lending rate the last time it deliberated on the matter is exactly because expected inflation is expected to be low in the near future.

Granted, Bank Negara’s loose policy may increase inflation rate in the future and even the yield seems to show that inflation may rise. Still, with falling crude oil prices in part due to an economic slowdown as well as perhaps persistent adaptive responses made earlier with respect to record fuel prices, a tendency for the rate to increase will be met with a downward force.

And how many people are jobless right now?

Surely we would expect a lot of people to be out of jobs if the Malaysian economy is melting away like an ice cream in a middle of a field at noon time. Yet, the unemployment rate was just about 3.5 per cent in the second quarter of 2008. That is pretty much the same for the second quarter of 2007 as well as 2006. How similar?

Well, the unemployment rate for the second quarter of 2006 and 2007 was both 3.4 per cent. That is not exactly a disaster, if you ask me.

Furthermore, it is quite hard to see how the measure of joblessness would increase dramatically, especially when the industrial production index does not show a decrease according to the latest figures we have for this year.

The prospect of growth also does not convince me that the unemployment rate would go up after controlling for seasonal effect. The growth rate of Malaysia’s Gross Domestic Product is expected to be positive in spite of mountains of bad news from overseas. In the most liberal manner, a recession happens if two consecutive quarters see negative growth rate. Malaysia has yet to see that and probably would not see that happening anytime soon.

Malaysia will miss its target but the rate will still be positive; both the Asian Development Bank and RAM expect the country to grow by at least 5 per cent. To make it clear how the fundamentals do not align with the prevalent pessimism in the market, the GDP growth rate for the second quarter of 2008 actually is higher than that for the same period a year ago.

Despite the respectable showing of various indicators including those of the real economy, the public and even the media are accepting the stock market as the barometer of the economy. Hell, some even take whatever direction the Dow Jones would take as indicative of the future path of the Malaysian economy.

The stock markets, however, do not measure the real economy. In fact, the stock market actually lags behind economic cycles. What it means is that whenever the stock markets are down, it is probably already too late to do anything. On top of that, the stock markets take into account various information which has little to do with the real economy. And the fact is that the real economy is doing better than the stock markets.

However, I am not belittling the economic slowdown we are experiencing. For some people, it is getting harder to make a living. After all, the coincident and the lagging indices do suggest that the economy is slowing down. Indeed, the situation in the US, the largest trading partner of Malaysia, is adversely affecting the local economy. Yet, despite dire prediction, the exports sectors are doing better than expected. Truly, believe it or not, the electronics sector is actually growing. The growth is at a snail pace but growing nonetheless.

What I am trying to get at is you should take your eyes off the stock markets and watch the indicators of the real economy instead. That, and keep your chin up.

A version of this article was published in The Malaysian Insider.