Adam Smith once said: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.”
True to Smith’s exhortation of the power of consumption, consumer spending is a key driver of an economy. It constitutes 54 per cent of Malaysia’s gross domestic product and is primarily relied on to boost growth. And, behind consumer spending is consumer confidence over the state of the economy.
This is because consumer confidence encourages consumers to spend more and, with the multiplier effect, results in increased demand for goods and services. These then turn the wheels of investment and propel economic growth. The reverse is also true. When consumer confidence falls, economic growth stalls.
Since 2015, Malaysia’s consumer confidence has remained pessimistic. Malaysia is an open economy. It relies on external trade which comprises roughly 120 per cent of its GDP. But, the continued weak global recovery since the 2008 global financial crisis has not helped prop up consumer confidence, neither in the global economy nor in the local economy. Accordingly, our economic growth has not been able to breach the five per cent mark.
World economic uncertainty has not helped either. Economic
stagnation has induced anti-global sentiments as personified by
Brexit-nationalism and Trumpian protectionism. The coming elections in The Netherlands, France and Germany fuel fears that nationalistic governments will be voted in. Terror attacks are a constant source of worry. All these dent the already-slow recovery in the European Union with implications to world economic growth. And, it will push the US dollar even further as funds look for safer havens.
Ringgit depreciation is another cause of anxiety for the man in the street over the state of the local economy, despite its resilience.
While not the only currency to do so, the ringgit has massively depreciated against the dollar. At roughly RM4.50 to US$1 the exchange rate is at its lowest in 19 years. The anticipated increases in interest rates in the US, to temper the fiscal enthusiasm of the incoming government, and the consequent outflow of the dollar seeking better returns in the US are among the factors depressing the value of the ringgit.
Sluggish property and stock markets negatively impact on wealth and do not bode well for consumer confidence. Compounding this is the fear of losing one’s job, especially given the recent massive layoffs.
The perceived decline in the standard of living is another dampener to consumer confidence. This decline can be attributed to rising inflation from increases in food prices, consequent to the removal of cooking-oil subsidy and rising petrol prices. With the coming festival that will boost demand, and the intemperate weather that will reduce supply, we can expect food prices to spike further. The decision to remove subsidies is economically justifiable. However, the inflationary effect on a slowing economy will do little for consumer confidence.
With slower growth, wages have remained stagnant. They have not kept up with the three per cent inflation rate resulting in lower real wages. This fall especially affects the middle- and low-income groups.
While we can expect consumer confidence and spending to languish at least during the first half of this year, the situation is not dire. Fiscal stimulus and tax breaks in the US as promised by president-elect Donald Trump may see the largest economy in the world growing at a clip. Trump’s bombast over-protectionism may not see the light of day as he confronts reality upon stepping into the Oval Office. So, the purported trade war with China and the abolition of the Trans-Pacific Partnership agreement just might not take place. The latter might perhaps be amended.
All this should give a boost to the world economy. Its growth should have a salubrious effect on oil and other commodity prices. By bringing in greater oil revenue into government coffers, and with rising exports, our economy, too, should improve during the latter part of 2017.
Continuing infrastructure developments and construction of affordable homes should signal a sense of vibrancy in the economy. When people see that things are happening in the economy, that should get them out spending.
Policymakers are working hard to restore confidence in the economy. Bank Negara Malaysia’s efforts to stabilise the ringgit is a case in point. Government could do more. Given the hardship wrought by market forces, the government should step in to aggressively increase the supply of food, through proper incentives to farmers, and through a cost-efficient delivery to the marketplace. There is more room for pasar tani, or farmers’ markets, to blunt food-price rises.
Recent indices of consumer confidence show a slight uptick of consumer confidence. It appears that consumer pessimism has bottomed out. Communication efforts must be intensified to dispel the misperception that the economy is in disrepair. Elections are widely predicted this year. Elections always have a favourable impact on consumer confidence, for, as always, elections are preceded with government goodies. That should further perk consumer optimism in the latter half of 2017.
Datuk Dr. John Antony Xavier is the head of Strategic Centre for Public Policy at the Graduate School of Business, Universiti Kebangsaan Malaysia