U.S. recession prospects, rate hikes to have spillover impact on Malaysia, emerging economies

KUALA LUMPUR, Aug. 8 (Xinhua) -- Recent hikes in U.S. interest rates and a looming recession in the world's biggest economy will negatively affect the global economy, with the fallout expected to impact emerging economies like Malaysia, analysts have warned.

A domestic economic slowdown in the United States and U.S. efforts to combat inflation through aggressive rate hikes could lead to greater market volatility and general disruptions that do not bode well for Malaysia's post-pandemic recovery, Executive Director of Malaysia's Socio-Economic Research Center Lee Heng Guie told Xinhua in a recent interview.

"The risk of a U.S. recession has surely soared, with the main uncertainties now being its timing and severity," Lee said. "Mixed economic indicators suggest that the U.S. economy will slow in the quarters ahead."

According to an estimate released by the U.S. Commerce Department on July 28, the U.S. economy shrank at an annual rate of 0.9 percent in the second quarter after a 1.6-percent contraction in the previous quarter. The figures satisfy the technical definition of a recession, while some economists argue that the economy is not yet in a recession.

Sharing similar worries with Lee over an economic slowdown in the Unite States, AmBank group chief economist Anthony Dass said the U.S. rate hike is partly driven by that country's own uncertain economic performance with the possibility of a recession.

By front-loading rate hikes aggressively in response to high inflation, there is clearly the fear of a recession, Dass said.

Lee noted that even if the economy slows sharply, the United States would continue to raise interest rates to contain inflation.

He added that higher interest rates and high inflation would reduce U.S. household purchasing power, and tightening financial conditions would cause U.S. investors to take a cautious stance toward investing in Malaysia.

"A sharp U.S. economic slowdown and recessionary condition and its consequential impact on the global economy will impact Malaysia and ASEAN (Association of Southeast Asian Nations) economies through lower exports, especially for the electronics and electrical products, furniture and fixtures, rubber products, chemical products and also would soften commodity and energy prices," Lee said.

Meanwhile, he added that the strong U.S. dollar and more capital inflows to buy higher-yielding U.S. Treasuries have exerted downward pressures on the Ringgit and currencies of other emerging markets.

The expectation of a higher interest rate will also cause a lot of volatility in the financial market in Malaysia and ASEAN, as higher interest rates and a stronger dollar mean that the emerging market currencies would weaken against the dollar, Lee explained, adding such a combination would "burden corporates and governments in emerging economies with higher borrowing costs."

Lee said Malaysia's economic recovery is still facing external headwinds and domestic issues that need to be managed, and called for an enhanced domestic investment climate to attract more capital inflows.