This article first appeared in Forum, The Edge Malaysia Weekly on January 23, 2023 - January 29, 2023

No, this is not a horoscope prediction. Every time I try to read my horoscope, it sounds more like a horror-scope! This is a simple projection of what went on in 2022 that could extend into 2023, which, barring any unforeseen circumstances and/or events, should hold for the year.

Well, 2023 is new, as is the Lunar Year of the Rabbit. It is not your usual year for economists and financiers. Rather, it is a troubling year in which major inflections are likely to happen and converge into one unified direction. Judging by what had happened in 2022, economists and major capital market players like those in the US are bracing for an F5-like tornado to hit the world’s economies, starting with the Western ones but not exclusive to them.

Still, the governments of Asean countries appear optimistic, as their economies have not had to be protected by what’s happening in the US and Europe … yet(?).

The economic policy battle for 2022 was a stark, divergent battle — pretty much a battle on two fronts that went in opposite directions, which ended pointing in one direction, where it has remained today.

At the start of 2022, the world was emerging out of its pandemic-induced lockdowns. This necessitated economic stimulus packages to restart the economic engines. However, buried into the economic being of nations then was the huge amount of relief spending doled out to help individuals and companies affected by the lockdowns. Billions were shovelled out.

The spending came on the tail of another huge spend by the Western economies, principally the US, in trying to forestall economic collapse due to the financial crisis caused by mortgage debt securities in 2007 and 2008. Hardly had the central banks started pulling out the excess liquidity in their “tapering” exercise that the Covid-19 pandemic hit, bringing lockdowns and another potential economic collapse with it.

How large an amount of money was put out? For the US, the epicentre of the 2007 and 2008 crisis, the best measure of “new” money put out would be to look at the M1. From December 2006 to November 2022, according to the St Louis Federal Reserve Bank, the M1 grew from US$1,368 billion to US$19,933.2 billion — that is, a growth rate of 1,357.11% for the 16 years, or a compounded 18.2% a year. That the M1 is almost at parity with the US gross domestic product of US$22,966 billion in 2021 would have alarmed every financial macroeconomist in the world. It would be akin to injecting a patient with his body weight of adrenalin to stimulate him; surely it could kill him instead?

Such massive amounts of money floating around typically means high inflation is coming. And so it came to be. US inflation shot up to almost 10%, as did that of the European Union countries, with the UK going over 10%. US and EU interest rates were raised multiple times to stifle and slow down inflation. “The war is on!” seemed to be the battle cry at the US Federal Reserve and the European Central Bank. Others followed, but don’t let the speed fool you. Many countries’ interest rates were at the “zero lower bound” to begin with, to use a financial macroeconomic term that meant they were at or near zero. The raised rates aren’t even “high” by any standards; the US fed funds rate is now at 4.25% to 4.5%, and there could be more upside to it. As Fed chairman Jerome Powell has implied, it is a long battle and inflation is stubborn.

How long a battle? As we had pointed out in our article in The Edge on Oct 10, 2022, “What happened to Malaysia when stagflation hit the US?”, elevated levels of the Consumer Price Index (that is, >3%) and Fed funds rate (>5%) lasted for 16 years from 1972 to 1987.

The inflation picture was made worse when Russia attacked Ukraine. Ukraine is a major supplier of wheat, corn and sunflower oil to the world. Indeed, food prices have shot up and even faraway Malaysia was hit when chicken prices shot upwards, as corn feed — which Malaysia is totally import-dependent upon — was hit by both the Ukrainian situation and the years-long drought in South America. Now there is a shortage of eggs, and no turkeys for Christmas.

All this will have an impact on economic growth for all countries. As the International Monetary Fund pointed out in its October 2022 World Economic Outlook, downward revisions for growth in the world’s economies have increased since last April’s report. For Asean for 2023, the downward forecast is a steep -0.9% to 4.7% growth. The weakening has begun. Malaysia too must play the long game.

So, there it is, the real issues that Malaysia will have to contend with in 2023 and the rabbit year will be centred on higher prices and higher interest rates. Thankfully, Corporate Malaysia is not highly leveraged, but households are. This means less disposable income as interest payments creep up. This will also hurt diets as a substantial portion of Malaysian food is imported (around a third at last count).

Will price controls help? Not really as, if controlled prices are lower than the cost of furnishing goods for sale, traders would lose money at every sale and would stop selling. Shortages would appear.

Would subsidies help? Yes, it is better than price controls but targeted subsidies are impossible to properly do (too many leakages would occur) and it all depends on the timing of the subsidy payments to the sellers. Overly long payment periods would risk the retailer going bankrupt for the lack of timely cash in hand.

Both measures are at best a temporary salve that might not work too well.

Hence, a higher global interest rate environment is likely to trigger price increases domestically and that will make its way to the Malaysian dinner table. It will also deplete demand and disposable income would become less and less.

Surely, you say, we can withhold raising our interest rate. Maybe, but we may be forced to raise it. The key mechanism is worth reiterating here. As other countries raise their interest rates, their currencies will rise in strength as depositors buy that currency to enjoy its higher interest rate. In this scenario, where the rising interest rate is not matched by another country, then the latter country’s currency will fall relative to the former country’s.

This then raises the cost of imports, that is, for all goods. Along with smaller disposable incomes and goods priced out of reach, misery levels will ratchet up. That is probably why nations big and small have kept up with the US’ interest rate movements — the US dollar is the most used currency in the world, after all.

Well, that to us is the story for 2023 and the Year of the Rabbit. Time for prudence and belt tightening. Good that we are already on a diet. All the best!

Huzaime Hamid is chairman and CEO of Ingenium Advisors, Malaysia’s financial macroeconomics advisory

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.