This article first appeared in The Edge Malaysia Weekly on October 24, 2022 - October 30, 2022

THE world is in for a challenging year ahead, as the sharp rise in interest rates over the past year amid the tightening of US monetary policy — which has taken a toll on currency markets, particularly in Europe and Asia — and China’s property crisis culminate in an imminent global recession, says prominent economist Prof Douglas McWilliams.

“The coming period is going to be tough as we cope with the aftermath of inflation and the hangover from cheap money. International trends will not be helpful at least in the short term with both Asia and Europe facing weak currencies, weak international demand and upward pressure on interest rates at least for the next nine months before a shallow recovery follows in 2024,” McWilliams, who is founder and deputy chairman of UK economics consultancy Centre for Economics and Business Research (CEBR), tells The Edge in an interview in Kuala Lumpur. He was in town for the Malaysian Real Estate Investment Trust (REIT) Managers Association forum last Tuesday.

The economist is predicting that the REIT sector will be in for a “tough time in a likely flight to quality [in which] the quality of the underlying assets will affect valuation”.

Prior to founding CEBR in 1993, McWilliams was chief economic adviser at the Confederation of British Industry, the UK’s industrial federation; chief economist at IBM UK; and chairman of the economics committee of the Union of National Industrial Confederations of Europe (now renamed Business Europe).

CEBR data shows that Malaysia’s gross domestic product (GDP) growth for 2023 may almost halve to 1.2% from 2.1% this year, before improving to 3.2% in 2024 and maintaining at the 3.1% level in the subsequent two years.

Singapore’s 2022 growth rate of 4% is predicted to plunge to 0.3% in 2023 before rising to 1.8% in 2024. Indonesia’s and the Philippines’ respective projected growth rate of 5.4% and 1.6% in 2022 could dip to 2.5% and 0.8% the following year, while Thailand is predicted to go from a growth of 3.2% this year to a negative growth of 0.6% next year.

China’s and India’s forecast GDP growth rates of 2.7% and 7% respectively this year are expected to weaken to 1.5% and 4% in 2023, before picking up to 2.4% and 5.4% the following year.

“Demand will be affected by [the] economic slowdown and there is a risk of flight to liquidity if there is a financial meltdown. It’s unlikely that we will get through this episode without various institutions and sectors being liquidated, [including] various banks although many of the most exposed are so tied into national financial systems that I expect them to be bailed out,” says McWilliams.

CEBR is also forecasting UK residential and commercial property prices to fall 20% and 25% respectively this year, while Southeast Asia may do better with price falls of only about half as much as in the UK. “As ever in the downturn, [there will be] a likely flight to quality, especially buildings that satisfy environmental, social and corporate governance,” he says.

On the local front, McWilliams believes that other assets such as equities will be affected at least as badly as those of the global markets, but he assures that when the economic slump lifts, Malaysia’s property market will rebound in spite of the short-term difficulties.

“In the longer term, property has an underlying basis in economic requirements. People need property to work and live. Long-term demand will continue and the sector will bounce back,” he says, adding that other investments such as equities tend to be “increasingly volatile as they become increasingly technology-based, [while] government bonds depend on politicians not to mention the exotic ends of the market like cryptocurrencies”.

McWilliams says the answer to whether a weak ringgit would have an inflationary effect on asset prices in Malaysia lies in the cause behind the weak local currency.

“If the ringgit is weak but there is demand for assets, that is one [factor to consider]. [But] I think the weakness of the ringgit today has to do with the drying up of liquidity, particularly in the US, which is bad news for asset prices in the short term.

“This could change when the world recession gets deep enough to start bringing interest rates down, but that could well be a distance into next year,” McWilliams says, suggesting that the weak ringgit, which may reflect investors’ unwillingness to invest in Malaysian assets, could be associated with lower, rather than higher, asset prices.

“In the longer term, it is likely that the world economy will have to adjust to higher expected yields, so it would make sense not to assume a full recovery in multiples to the levels of the past decade,” he says.

On the decline of foreign shareholding in Bursa Malaysia-listed stocks to a record low of 20.1% in August before rising to 20.6% in September, McWilliams says there is no clear single factor that influences investor sentiment.

“My guess is that the 1Malaysia Development Bhd [scandal] and political instability haven’t helped Malaysia. Sadly, it is easy to lose reputation and hard to regain it. Political stability post-election would help. Clear and consistent tax and regulatory policies help,” he suggests.

According to CGS-CIMB Securities, which has been tracking foreign shareholding of the bourse’s equities since 2007, the highest figure on record was 27.4% registered in April that year while its next lowest figure was 20.3% in November 2009.

“But what generally turns around sentiment in the longer term is a sustained period of higher yields and absence of scandals. If investors in Malaysia make consistently higher returns than those who invest elsewhere, it will send a signal to other investors that Malaysia is undervalued,” McWilliams says.

McWilliams believes a global recession is imminent and more acute than what the International Monetary Fund (IMF) has projected of global growth slowing from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. The fund forecasts global inflation to rise from 4.7% in 2021 to 8.8% this year, while declining to 6.5% in 2023 and to 4.1% by 2024.

IMF said monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy.

Despite the IMF downgrading its global forecast, McWilliams still views its projections as being overly optimistic.

“[That’s because] it does not take into account what’s going on in the US [or] China. It does look to me as if 2023, in particular, is going to be a really tough year. We are also having to cope with the aftermath of excessively low interest rates — [which leads to] people making all sorts of bad financial decisions and you only discover how bad they are when interest rates [rise] again,” McWilliams warns.

In the UK, embattled Liz Truss, who resigned as prime minister on Oct 20,  was forced earlier this month to scrap her plans to remove the 45% top rate of income tax on high earners after it roiled financial markets and sparked a growing mutiny in her Conservative Party. As at last Wednesday, Chancellor Jeremy Hunt had reversed most of Truss’ mini-budget.

“I recognise though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party,” Truss reportedly said. She was in office for just 44 days, making her the shortest-serving prime minister in British history.

“I don’t think the UK is the only country [to experience a political-financial crisis]. We’ll see similar things in other countries around the world. And they will need very active management by the authorities to ensure that they can fight the fires when the fires break out,” McWilliams remarks.

A recovery of the global economy by 2024 would also depend largely on China, he points out.

The worsening property crisis in the world’s second-largest economy, characterised by slumping apartment sales amid debt defaults by developers, is reportedly dragging US dollar-denominated bonds from borrowers deeper into distress.

China also faces discord as its people protest against President Xi Jinping’s draconian implementation of the zero-Covid strategy, which has had tremendous implications on its economy and global supply chains. At the 20th National Congress of the ruling Communist Party in Beijing, which began on Oct 16, Xi was said at press time to be poised to be awarded another term in office.

Besides China licensing most Western vaccines for use as well as the efficacy of its own vaccines, which have been critical to fighting the infection, McWilliams also sees Hong Kong’s abandonment of the zero-Covid policy as a test bed for China to monitor its efficacy before following suit.

“If it works, something more like a Western system could be adopted in China. [China] wouldn’t do it in Hong Kong if it weren’t trialling [the abolishment of the zero-Covid policy]. I don’t see why they would experiment in Hong Kong and then ignore the results. Obviously, I don’t think they will say, ‘We’ve changed our minds. We were wrong.’ They will do things in a slightly different way [and] relax things gradually. It’s good for the world and one of the most hopeful signs and one of the reasons I expect that by 2024, we will be moving into recovery mode,” he says.

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