This article first appeared in The Edge Financial Daily on February 25, 2019
KUALA LUMPUR: Finance Minister Lim Guan Eng said the 0.7% year-on-year (y-o-y) decline in the January Consumer Price Index (CPI) did not arise from any weakening of demand or economic growth. Instead, he said, it was largely caused by supply factors in the form of cheaper input cost.
Guan Eng said the country’s economy is strong, expanding by 4.7% last year and is expected to grow by a further 4.9% this year, and the strong growth dispels any deflationary fears.
“The CPI decline proves that the government’s policy of abolishing the goods and service tax (GST) and replacing it with the sales and service tax (SST) and stabilising fuel prices with a ceiling price mechanism works by expanding the economic pie to benefit both businesses and the people,” he said in a statement yesterday.
“The fall in prices is due to cheaper input prices. Prices of RON95 petrol for instance was approximately 13% cheaper in January 2019 compared to a year ago and this has positively affected the prices of goods and services that are free from GST.
“The fuel price stabilisation policy in particular passes the savings from cheaper fuel prices directly to consumers immediately, while the ceiling price mechanism protects them from high and soaring petrol prices,” he added.
Guan Eng said the price decline should improve the purchasing power of Malaysian consumers and add to economic growth.
He noted that the low inflationary environment has encouraged private consumption to grow at a fast pace of 9% and 8.5% y-o-y in the third and the fourth quarter of last year respectively.
January CPI fall different from 2009 deflation
Guan Eng also stressed that the January 2019 price decline was very different from the deflation Malaysia last experienced in 2009.
“During the global financial crisis, Malaysia suffered a recession with the GDP [gross domestic product] contracting by 5.8% in the first quarter, falling 3.7% in the second quarter and finally decreasing 1.1% in the third quarter of 2009.
“It is crucial to highlight that y-o-y year price deflation followed soon after the 2009 recession began.
“Furthermore, industrial production declined significantly prior to the recession and the price deflation. This means the 2009 deflation was caused by a recession as households and companies tightened their belts significantly,” he said.
On the contrary, Guan Eng said the January 2019 price decline was not caused by recession or any kind of weak demand. The same severe GDP contraction Malaysia suffered in 2009 is nowhere to be seen today while industrial production is rising well based on data in recent quarters, he said.
“While the first quarter 2019 GDP and the industrial production figures are still being compiled, current observations on demand suggest both statistics will experience growth.
“Yet another proof that the economy is healthy is the fact that Nielsen survey shows Malaysia’s consumer confidence stood at 118 points in the fourth quarter of 2018, 24 points higher from a year ago. The jump is the highest among all countries surveyed and it places Malaysian consumers as the seventh most confident among 64 economies,” he said.
The finance minister acknowledged, however, that despite the 0.7% drop in the CPI, there is much to be done in bringing the living costs of ordinary Malaysians to a more manageable level, especially for those belonging to the Bottom 40% group.
“The government is working to ensure that the benefits from the reduction in CPI can be channelled downwards to a wider segment of Malaysians,” he said.