by Ranjit Singh
RAM Ratings Services Bhd recently lowered its inflation target for 2020 from 0.7% to 0%. The lower projection was brought about by subdued global oil prices, weak demand and steep discounts for household electricity bills.
The government had announced that households will be entitled to a six-month (April-September) discount ranging from 2% to 50%, depending on their electricity consumption rate. RAM Ratings said electricity has a 2.7% weightage in the overall CPI (Consumer Price Index) basket and this move is expected to ease inflation by 0.2 percentage points.
Bank Islam Bhd chief economist Mohd Afzanizam Abdul Rashid told FocusM that the inflation projection points to a weak economy. He also said with the zero inflation, business owners will see their profits curtailed.
“Yes, it reflects weak demand conditions and the anticipation of lower fuel prices. In that sense, zero per cent inflation is not good for the economy as businesses may have less profit and therefore, they would have fewer means to reward their workers,” said Afzanizam.
The presence of a reasonable percentage of inflation was a sign of a healthy economy and according to Afzanizam the acceptable rate of inflation was around 2%.
“So what we need is an economy that continues to grow positively with a reasonable rate of inflation. Perhaps around 2% inflation is deemed acceptable with GDP growth of around 4.8% to 5%, a growth rate that is non-inflationary.
“So presently, GDP growth could come down as low as -2% with an inflation rate of near zero. Certainly, the economy is currently very weak and it needs some form of a booster to elevate the growth trajectory,” added Afzanizam.
RAM Ratings said a key trigger of the downward revision is the possibility of a deeper and more persistent weakness in oil prices amid a supply glut.
Despite the recent Opec-led agreement to cut production which was the biggest on record , the move may be insufficient to offset the overwhelming loss in demand amid the coronavirus pandemic.
The US Energy Information Administration expects global oil demand to shrink 5.2% in 2020, more dire than the 1.0% contraction during the global financial crisis in 2009.
Meanwhile, Dr Yeah Kim Leng, professor at Sunway University told FocusM that inflation could turn negative if the economy continued to decline rapidly.
“With domestic and global demand projected to undergo a sharp decline and recover gradually depending on the success in preventing a reemergence of the pandemic, a zero or flattish inflation scenario is therefore likely. Already a collapse in demand due to lockdowns in almost all Covid-19 hit countries compounded by oversupply has driven oil prices to historic lows.
“Food prices, especially fresh produce, however, could be volatile. Higher prices are expected for farm produce facing shortages caused by lower production, panic buying and logistics problems arising from movement restrictions.
“For selected items where production is unaffected but demand is curtailed due to distribution bottlenecks and changes in lifestyle triggered by the Covid-19 pandemic, prices will fall. Overall inflation could turn negative if the economy were to experience a sharp and prolonged decline,” said Yeah.
Bank Negara Malaysia said the Malaysian economy would probably register GDP growth of between -2% and 0.5% for 2020. In 2019, Malaysia posted GDP growth of 4.3%. The current Covid-19 outbreak which has caused major disruptions to supply chains and affected demand adversely is expected to have a pronounced effect on the economy going forward. – April 21, 2020
