Recession: how bad can it get?

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Gan Chun Kiat is an optimistic person but lately he can’t help but worry about the economic slowdown as customers delay or revise their orders. Gan supplies office furniture to companies, including some which are listed on Bursa Malaysia. So far this year, sales have been down 15% compared to a year ago. “Business has been affected. I have clients delaying expansion plans, slashing their annual budget for office renovation or opting for lower grade of furniture to save costs,” he says. Gan is among many businessmen in Malaysia who is feeling the pain of the current economic downturn. Indeed, last Friday, data released by Bank Negara Malaysia showed that GDP had almost ground to a halt in the last quarter of 2008, growing at a meagre 0.1%. This was sharply below market expectations of between 2% and 3%.Growth grinds to halt in 4Q2008The fourth quarter’s performance was substantially down from the 4.7% growth achieved in the third quarter, bringing the overall growth in 2008 to just 4.6%, well below consensus forecast of 5.3%. The sharp fall was due to contraction in three key sectors — construction (-1.6%), mining (-5.7%) and manufacturing (-8.8%). The key growth driver was services, which grew at 5.6%, which is still substantially lower than the 7.1% recorded the preceding quarter. Agriculture grew an anaemic 0.5%.Domestic demand slowed to 3.1% from 6.5% in the previous quarter while private consumption came in 5.3%, down from 8.1% before.The economy’s dismal performance in the last quarter is reinforcing views that Malaysia is already in a recession. Expectations are that the next two quarters can only show further contraction, given that the external climate has deteriorated further since the beginning of the year. PromptCon Sdn Bhd, also a furniture maker exporting predominantly to the US, the Middle East and Northern Africa, is being hit hard by the global economic slump. The usual buzz of activity is now absent from its factory in Klang as a number of its production lines are now in idle mode.Manager Soo Chu Kuan says orders from abroad have almost come to a complete halt. “We have received very few orders from the US and the Middle East. This is the worst many furniture makers have experienced in the past three decades or so,” Soo tells The Edge.“We have been through downturns, like the 9/11 incident in the US, but this is the worst in terms of order flow,” she adds. PromptCon was spared during the Asian financial crisis 10 years ago as the weakening ringgit helped boost revenue. Unfortunately, although the ringgit has depreciated 15.5% against the US dollar compared to a year ago, making its products cheaper in US dollars, there isn’t much buying interest.The company benefited from the US property boom when Americans were spending generously on new furniture for their new homes. Likewise, the current crisis is a big blow to the company as a result of the sharp fall in demand for durable goods, such as furniture. According to Soo, some of her counterparts in the industry have been told to stop deliveries to the US although the products are ready for shipment. “Many companies are facing tight cash flow now because of the cancellations,” she adds. Soo had noticed sales slowing back in 2007 when the US subprime crisis first reared its ugly head. But it got worse in the second half of last year and shipments for Christmas shrank almost by half. Now, orders are drying up.In view of the tough operating environment, the OEM furniture manufacturer has trimmed its staff force from 350 to 200 since early last year. It also did not renew its contracts with its foreign workers. Collapsing export demandBusinesses, whether big or small, domestic or export-oriented, are feeling the pinch of a global economic slowdown. Judging by the latest reporting season which just ended, earnings of public-listed companies have shown the strains of operating in the increasingly difficult business environment of 2008. Two months into 2009, the outlook has become even bleaker, indicating that more bad news may be in store for the next few quarters of reporting season.  Certainly, the bleak trade figures emerging over the last few months lend credence to economists’ prediction of a recession in 2009, given Malaysia’s dependence on exports. In December, Malaysia recorded the sharpest decline in exports in close to seven years as export growth plunged 14.91% compared with a year ago.  In the last quarter of 2008, exports fell 13.4%, compared with a growth of 5.1% in the third quarter.Meanwhile, as manufacturing activities slowed, imports of intermediate goods — a major component of total imports — fell as well, leading to a decline of 23.1% in overall imports.  For the whole of 2008, exports expanded 9.6% while imports grew 3.3%. While export grew at a robust 16% in the first nine months, it declined an unprecedented 13.4% in the last quarter, indicating challenging times ahead for 2009 and possibly early 2010, International Trade and Industry Minister Tan Sri Muhyiddin Yassin said.With trade stalling, it has been reported that the Port Klang Authority expects container throughput to contract by 10% this year compared with the 12% growth in 2008. Anecdotal accounts of “boxes neither moving in nor out” at some of the country’s major ports paint a bleak picture of the economic situation.There is no escaping the rippling effects of the economic and financial crisis in the US since it is still the biggest consumer market in the world and one of Malaysia’s biggest trade partners.  The impact of troubles in the US is now evident as exports of electrical and electronic (E&E) products, which are mainly used as components in electronic gadgets and equipment, fell by 27.1% in December from a year ago. For the whole year, E&E exports declined 3.4% compared to 2007.Listed semiconductor sub-contract assembly operator Unisem Bhd fell into the red in 4QFY2008 as revenue declined due to the global economic slowdown. In notes to the accounts accompanying its result announcement to Bursa Malaysia, the company said visibility remains poor and current weakness will continue into the first half of this year.“In response to the declining business volume, aggressive measures have been put in place to mitigate the slowdown. These include headcount reduction, cancellation of annual salary increases, reductions in working days and wage cuts for the employees,” the company explained, adding that it is confident of its long-term prospects despite the short-term negatives.Similarly, Malaysian Pacific Industries Bhd, a company involved in semiconductor assembly and testing, reported a net loss in 2QFY2009 due to weakening consumer demand as a result of the global economic crisis.Hard disk manufacturer Eng Teknologi Holdings Bhd has also fallen victim to the global economic meltdown, registering a net loss in 4QFY2008 as customers demanded less of its products and services. Going into 2009, the company warned of low visibility in terms of demand for its products although efforts have been taken to reduce costs in anticipation of lower revenue. The company forecasts a loss in 1QFY2009 as the cost-cutting process will take one quarter to take effect.Other sectors of the economy have felt the pain, too. Ann Joo Resources Bhd, a local steel mill focusing on long products used in construction, has stopped selling its products overseas since last August.“There wasn’t any order which we feel we could do. It was very tough negotiating for export because the prices were very volatile, and there was a huge difference in pricing between the customers’ prices and what we could sell at,” says Datuk Lim Hong Thye, the company’s group managing director.

Things could be changing for Ann Joo soon as Lim says prices have stabilised somewhat and the company has started exploring for export opportunities in Singapore, Vietnam and Indonesia. It hopes to resume exports by April, he adds.In the red since 1QFY2009, pharmaceutical company Hovid Bhd did not manage to staunch the flow of red ink as the company reported another quarter of losses in 2QFY2009. Its financial year-end is June 30. Its CFO Andrew Goh explains that the losses were incurred by the group’s subsidiary Carotech Bhd, which makes phytonutrients and biodiesel. The group’s pharmaceutical business remains profitable.“The losses (at Hovid Group) arise from the Carotech Segment, which is caused by unrealised foreign exchange loss arising from the revaluation of our US-dollar denominated loans due to the weakening of the ringgit,” he explains in an email.Even so, the group recorded lower revenue for the cumulative period, mainly due to lower selling prices for biodiesel and oleochemical products in tandem with lower CPO prices.  Sales from abroad make up 76% of Hovid Group’s total sales, with most of it coming from Europe because of the sale of biodiesel to the European Union. To tide itself during this challenging period, the group aims to improve efficiency and reduce costs while looking at new ways to increase sales, says Goh.How bad will it be?So, how bad will it be? The prognosis is not good. In Asia, several economies have reported negative growth in the last quarter — Thailand, Taiwan, Hong Kong and Singapore.Last Friday, the US said its economy contracted 6.2% during the last quarter of 2008, posting a final-year growth of just 1.1%.And the world’s macro-economic conditions remain very volatile. As an indication of the uncertainties, the growth outlook for the world economy has been revised several times in the last few months. The International Monetary Fund, for one, has revised global growth for 2009 at 0.5% from 2.2% before. This is the lowest growth rate since World War II.“This is already a global recession,” says Malayan Banking Bhd’s president and CEO Datuk Seri Abdul Wahid Omar at a news conference last Friday unveiling the banking group’s interim earnings results. “It’s going to be tough not just for Malaysia but for every single economy in the world,” he says. The continued deterioration in the external environment is bad news for an open economy like Malaysia, which is export-dependent for its growth. The World Trade Organisation has forecast that world trade will contract by 2.1% this year, the first contraction since 1982.CIMB Research, in a report, says real output is expected to shrink by 1% in 1H2009,  before recovering to between 2% and 2.5% in the second half to post a growth of 0.8% before recovering by 3% in 2010. In a worst-case scenario, it expects a contraction of between 0.5% and 1.5%. Several foreign research houses are even more pessimistic, projecting growth to contract by some 3% to 4% this year.Indeed, economists contacted by The Edge after the release of the report on the economy’s performance in the last quarter of 2008 say they expect a sharper GDP contraction in the first and second quarters of this year. “The last quarter numbers surprised on the downside… it’s back to the drawing board to relook the numbers and assumptions,” says an economist at a local research house.Even so, some economists are already looking at a contraction of between 1% and 2% in 2009. The pessimism is based not just on a plunge in manufactured exports but also on the weak outlook for crude oil and crude palm oil prices, which in recent months, have fallen by more than 50%.The growth forecasts take into consideration the pump-priming effects of the second stimulus plan and Bank Negara Malaysia’s aggressive rate cuts since November last year.Although the government has not indicated how large the mini-budget to be unveiled on March 10 will be, economists and the market believe that anything below RM15 billion will not have the desired impact. “Given the severity of the downturn, the mini-budget has to be comprehensive, yet targeted at key areas,” an economist says. In this context, he believes that the focus should be “putting money in the pockets of the people” so that domestic spending will not be choked off by negative sentiment and an erosion of confidence.The thing is, this recession is expected to be worse than in 1998, during which growth plunged by 7.5% as a result of the Asian financial crisis that started in 1997. However, during that time, the contraction was steep but brief — it was quickly followed by a sharp recovery of 4.3% in 1999, thanks to the fact that the industrialised countries, which are also Malaysia’s key markets, were not in recession. Therefore, export demand was not significantly impaired.This time around, while GDP contraction is seen at between 1% and 3% in 2009, economists do not expect a sharp recovery in 2010. With the macro-economic environment still hostile, analysts don’t see a significant earnings rebound in 2010.Much will depend on how effective the stimulus plans of the industrialised countries will be in the coming months, particularly the US and Europe. What economists and analysts see is a very mild GDP recovery in the domestic economy in 2010, with growth sluggish at between 1.5% and 2.5%.The current situation is somewhat similar to the recession of the mid-1980s, when growth contracted 1.1% in 1985 before recovering to 1.2% in 1986. It was a period that saw erosion in per capita income, with unemployment soaring to 8.3% in 1986 and 7.3% in 1987.Reality is finally biting. Malaysians are in for a rough and painful ride ahead. However, at the end of every economic down cycle, there will always be an upswing. It is how we prepare for this upswing that is important now.This article appeared on the Cover Story page, The Edge Malaysia, Issue 744, March 2-8, 2009