This article first appeared in Forum, The Edge Malaysia Weekly on December 9, 2019 - December 15, 2019

Let’s assume that Malaysia’s economy continues to closely track the global economy’s performance in the next 10 to 20 years. Given the strong correlation between global growth and Malaysia’s economic performance, this assumption is not unreasonable. In fact, this could also be the case for many other Asian export-dependent economies.

Now, imagine that the global economy goes through what is termed by some economists as “secular stagnation”. This is a situation where growth remains lacklustre in the next few years. How will open economies like Malaysia and Singapore position themselves to deal with such a phenomenon? This is something worth pondering.

Even if the reader is unfamiliar with secular stagnation, it sounds a bit eerie. It could, in fact, raise some degree of anxiety. It has gloomy, bleak and uninspiring connotations. Yet, this is what a number of economists have increasingly been bringing up when discussing the prospects for the global economy.

Admittedly, there is now a larger camp that accepts such an economic dogma. The term, which essentially suggests that the global economy is entering a long period of negligible to no growth, was resuscitated by former US treasury secretary Lawrence Summers in 2013 when he suggested in one of his speeches in New York that it “may be the defining macroeconomic challenge of our times”. The reasons for this are easy to understand: an ageing population (especially in advanced economies), lack of investment and slowing productivity growth, among others.

All this is actually happening around the world. Private sector debt is rising, particularly in emerging market economies. At the same time, capital spending is slowing. The corporate sector, which used to be aggressive in borrowing to expand its business capacity, is now standing on the sidelines.

This trend became entrenched especially after the global economy witnessed two major crises — the 1997/98 Asian financial crisis and the 2008/09 global financial crisis. Painful memories of its struggle to ride out both crises have left the corporate sector with a vastly different tolerance for risk. Stronger risk aversion has characterised the sector’s decision-making process more than ever, resulting in a less aggressive stance when making capital investments. This, in turn, has hurt productivity and the overall economy.

With households and the corporate sector hesitating to spend, the outlook is bleak — the perfect recipe for a long period of economic stagnation. Add to this gloomy scenario the rise of protectionism, which is threatening multilateralism. Uncertainties over trade policy changes by the major economies have compounded anxieties among global exporters and importers. This has clouded decisions on capital investment and exerted pressure on export-dependent nations in Asia, including Malaysia.

The general economic prescription for secular stagnation is perhaps higher fiscal spending. This is because monetary authorities are increasingly seeing a limit to the effectiveness of their policy tools for countering downturns. Indeed, during extended periods of low interest rates, the economic effects of further reductions in borrowing costs just fade. This is only to be expected. Even the effectiveness of the negative interest rate policy in stimulating aggregate demand is highly debatable as it could hurt the banking sector’s bottom line and crimp lending growth.

For countries with sufficient fiscal space, the situation is bearable. They can “loosen up” slightly and spend their way to defending or lifting their future growth trajectory. But for those dealing with persistent budget deficits, the task becomes more arduous: any increase in spending will attract international attention, particularly that of the global credit rating agencies.

With capital flowing rapidly from one shore to another at the click of a mouse, any negative narrative by these rating agencies could rattle the financial markets, raising currency volatility for these countries. If this persists long enough, it could affect their real economies. As for Malaysia, the government’s delicate balancing act has thus far led to relatively successful fiscal consolidation and a stable sovereign rating.

Notwithstanding this, it is noteworthy that Asian economies have been embracing slower growth since the Asian financial crisis. A case in point is Malaysia, where growth has cooled from an average 9% in its heyday in the early 1990s to around 5% per annum now, mainly as a result of slower investment.

Businesses have restrategised to cut wastage and remain lean. Similarly, employees have learnt to live in a different corporate environment, where generous rewards such as 12-month annual bonuses that were fairly common in the early 1990s are no longer heard of. Similar developments are taking place in regional economies. For instance, Indonesia — supported by large domestic consumption — is now getting used to a growth pace of 5% per annum compared with 8% to 9% per annum prior to the Asian financial crisis.

What it all boils down to is this: if global economic growth pans out like in the scenario painted by Lawrence Summers, open economies like Malaysia and Singapore should accelerate efforts to ensure their citizens are not overly burdened by financial difficulties. Our government’s Shared Prosperity Vision 2030 will thus play a pivotal role in easing some of the burdens.

If we can move towards the government’s targets by 2030, for example share of employee compensation to GDP of 48% and a minimum living income level of RM5,800 per month for the B40, then resentment among the vulnerable groups can be minimised.

In other words, citizens will not likely grumble about slower economic growth if the prosperity pie is more evenly distributed. This is why something as inspirational as Shared Prosperity Vision 2030 should be periodically reviewed to determine if we are getting closer to the targets we hope to achieve.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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