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What is a V-shaped economic recovery?

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Macroeconomics is a branch of economics that studies how an overall economy—the market systems that operate on a large scale—behaves. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment. This definition is a comprehensive one provided by investopedia.com (click any of the links to read)

Now that you know what is macroeconomics, today we look at economic growth and GDP. What is a V-shaped recovery? Based on some recent predictions, there’s this potential that after the COVID-19 pandemic is over, the GDP growth of Malaysia may rebound quite fast. Just as many predictions are for a negative growth for Malaysia in 2020, there are also many very positive forecasts for 2021 for Malaysia’s GDP growth. Highest of these would be 9%. Click here to read yeah.

Let me explain this in an easy to understand manner. V-shaped recovery usually happens when an economy plunges quickly into a recession. With the current COVID-19 pandemic, most countries are under a lockdown. Whether it’s known as a Movement Control Order (MCO) or even a Circuit Breaker (CB), it’s still a a lockdown. With business premises closed there are no economic activities. Thus, the quarterly number can quickly become negative. This has happened even for China and will happen for the U.S. as well as most other countries you and I know all around the world.

With all these lockdowns, then how could an economy recover quickly? In a financial crisis like in 1997/1998, almost every business and every employee is affected. Non-Performing Loans (NPL) spike and the banks were all in trouble and was in no position to keep lending even to businesses who just needed the funds to keep themselves afloat and could quickly turnaround as soon as the economy recovers.

Briefly, at the time, Malaysia instituted capital control (for stability) as well as to force the merger of all banks (for consolidation) and also to take over all these NPLs from the banking sector via Danaharta. These measures helped the market get all the different boosts it needed. In 1998 Malaysian GDP declined by -7% and by 1999, the GDP recovered to a positive 6.14%. By 2000, the GDP growth improved further to positive 8.86 %. So, if we look at 1998 vs 1999 and 2000, our recovery was V-shaped as well.

So, what is on our (Malaysia) side this time? Well, this time, our banks are at position of strength. Most have good profit numbers for 2019 and low non-performing loans and while this is expected to rise, it’s forecasted to be just 1.8% for 2020. (In 1998, it was double digits). Secondly, we have a Prihatin Stimulus plan which seeks to minimise business closures as much as possible and keep the most vulnerable with wage subsidy.

Most importantly, because the banks were at a position of strength, all of them were able to offer a moratorium of 6 months to all the loans. It means that if the person’s income is affected currently, he does not yet need to worry about loan repayments until October. The catch is, the job market has to start normalising before then so that everyone has a salary to start repaying again by October.

What this tells us is that if the MCO is over by end May and the economy slowly restarts by June onwards, people who lost their jobs have 3 months to get another job before they needed to star repaying the loans. At the same time, the businesses who managed to survive the MCO will now restart their engines. The employees who did not lose their jobs would now start to become positive again since they could now be speaking to customers, seeing more sales and manufacturing plants could even start producing goods and the services industry starts to serve customers again. I know, all these may not happen as per what was planned. However, if these happen as per what was planned, then GDP Malaysia may see a V-shaped recovery. V for victory against COVID-19 pandemic yeah. Happy understanding.

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Next suggested article: WOW, property markets spring back to life?

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