KUALA LUMPUR: Reduced demand for Malaysian goods and services in the global market, and a GST-induced drop in domestic demand will expose Malaysia to the threat of stagflation, a DAP lawmaker warned yesterday.

Kluang MP Liew Chin Tong said the government appeared not to have recognised the danger of stagflation, which is the combination of a stagnant economy and high inflation. It is a period accompanied by rising unemployment and lack of growth in business activity, besides depressed consumer demand.

Liew, who is also DAP’s national political education director, said the GST (goods and services tax) and fuel price hike will force people to consume less, thus hurting domestic demand, which is a prime mover of the economy.

At the same time, Malaysia would not be able to rely on exports to boost the economy, given that demand in the three major global markets of the United States, Europe and China is either weak or stagnant.

He said this, coupled with the fuel subsidy reduction, which made goods and services more expensive, was draining the disposable income of ordinary Malaysians.

“The consequences of impending stagflation could be dire in terms of macroeconomics, with no growth, no wage increase, few jobs and a higher cost of living.

“The trickle-down effect on the rakyat, especially on the lower-income group, will be painful,” Liew said, adding that this can be seen in countries such as Russia, Thailand and the US, which had experienced stagflation in the 1970s.

He urged Putrajaya to take heed of this “red flag” and address the threat of stagflation with appropriate policy responses, or risk the consequences.

Liew also said that following the unveiling of Budget 2015 last month, the government and its backbenchers tried hard to gloss over issues surrounding GST-induced inflation and did not address the real danger of stagflation.

“The government defends itself by saying that there will be a small increase in prices for the short term, and that some goods would see a fall in prices due to the removal of the sales tax.

“That is essentially the line adopted by Prime Minister Datuk Seri Najib Razak, but GST-induced inflation [will be] a given, “ Liew said. — The Malaysian Insider

This article first appeared in The Edge Financial Daily, on November 7, 2014.