Concepts, Effects and Implications of Recession for Various Sectors in Malaysia
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Economic recession is a protracted decline, e.g. one year, in a country's economic activities and Gross Domestic Product. During this time, there is a change in major areas of the economy, such as an increase in unemployment, decrease in production, a drop in real income and dwindling wholesale and retail sales.
Recession-Proof Economic Sectors of Malaysia
Even though inflation takes a toll on most major sectors of the economy, such as the manufacturing sector, certain sectors remain recession-proof. In Malaysia, the mining sector, the agricultural sector, tourism sector and transport sector tend to remain stable in times of a financial crisis.
The Agricultural Sector
This is a sector that has proved its resilience in times of recession. It has also received constant support from the government aimed at boosting palm oil production. The government has also lowered agricultural and industrial activities, such as the use of chemical inputs that affect palm oil yields (Rahimatsah, 2007). Other legal and regulatory frameworks implemented in Malaysia govern the agricultural and environmental management initiatives meant to spur governance of sustainable growth (Azmi, 2006). They include the National Agricultural Policy (NAP), National Environmental Policy, National Conservational Strategies, as well National Policies on Forestry and Biodiversity (Tan et al, 2007). The policies are product-oriented and intend to increase the economic yield gained from agriculture. They safeguard and expand land meant for agricultural use, as well as offer incentives to agriculturalists. They, therefore, make it easier and more profitable for commercial farmers to produce more agricultural goods for export.
Small and Medium-Sized Businesses Growth
These benefit from recession due to low competition posed by larger firms. Small-sized businesses are easier to run and make a profit; their growth level is also on par with major market players. Larger firms find it hard to lower prices, because they already experience loss of income due to declining sales. Smaller firms can, therefore, trade comfortably at prices similar to those charged by larger firms; and with proper management they can rise to the top.
The Banking Sector
This sector may benefit from the liquidation of assets by large firms and subsequent deposits they make in banks and financial institutions. This will also be accompanied by a rise in savings made by middle and small-income customers as a result of decreased spending. Commercial banks also benefit from some of the measures put in place by the central bank in order to retain investors' money in the country (Jomo, K and Wee, 2004). They, therefore, have a good capital base to cushion them during the crisis.
The Tourism Sector
This sector may also remain resilient to recession, given that tourists from economically stable countries may rush to profit from the diminishing value of the local currency. The government may also put measures in place to boost the sector in order to avert the prevailing deterioration in national income.
The Social Sector
The education sector is one of the social sectors that tends to remain resilient during recession. This stems from the fact that its major resource is labor, which becomes cheaper during recession. People may also start investing in formal education because of the negative indications that business gives them as a source of income.
Businesses that provide social services, such as night clubs and casinos, may also remain recession-proof because of habitual spending that most of their customers may exhibit. Companies that produce habitual goods, such as beer and tobacco products, may also withstand crisis fairly well.
The media sector also benefits from recession, since businesses resort to advertising as one of their survival strategies. Joblessness may also boost this sector, as unemployed people seek to occupy themselves, as well as use the media to search for employment opportunities. Strategists also seek information on market trends and signals of economic recovery through the media.
People tend to gather in social units in times of crisis, and economic recession is no exception. Retrenched people may resort back to their family units, and social spending may take a toll on them.
The Mining Sector
This sector contributes significantly to Malaysian exports. Malaysia is one of the largest tin-producing countries in the world. The loss of value of its currency makes foreign investors consider investing in the country’s mines in order to gain profit in the short run. The country also has substantial oil and gas reserves. Demand for energy worldwide guarantees ready market for such goods, even in times of recession.
Implications of Economic Recession
Reduction in Consumer Expenditure
Recession makes consumers reduce their expenditure in order to save money, as they anticipate an increase in prices. Businesses, therefore, lose sales and begin to experience losses as a result of lack of necessary production factors.
Reduction in Exports
This is reflected in the export of electronic appliances and electrical machines, and it can be attributed to the decrease in their production, as well as low demand for the Malaysian currency internationally.
Employees working for production companies lose jobs as a result of their employers closing up or cutting down on their recurrent expenditure on wages. Retrenchments are always on the rise, as people resort to taking jobs that pay less for their skills than they deserve.
Decrease in Long-term Investment
The loss of demand for goods and services experienced by businesses sends a negative signal to investors, who may reduce their confidence in the economy. They, therefore, tend to withdraw their capital investment and thus cause a decline in the overall production of the country and this reflects negatively on the Gross Domestic Product GDP (Khor and Martin, 2000). However, there could be an increase in portfolio investments, as was seen in Malaysia's recession phase of 1998. These are opportunistic for investors who invest in the country's stocks with the intention of gaining profit from a possible recovery of its currency.
The Malaysian government made an attempt to curb the upsurge of such investors by putting in place stringent policies that required portfolio investors to deposit funds with the central government, where they would be retained for a certain period of time. Despite this measure being put in place, there still remain risks posed to the economy by other types of capital flaws, such as opportunistic foreign investors and highly speculative foreign funds.
Declining Interest Rates
The fall in interest rates experienced during recession always causes investors to withdraw capital due to loss of confidence in the market. They tend to liquidate most of their capital as a way of preparing for the fall resulting in more money in banks. The banks consequently offer low lending rates to their customers (Hendersen et al, 2004). Customers who have outstanding loans seek buyers of the same, and financial institutions may experience a hive of economic activities, unlike other businesses.
Effects of Economic Recession
High prices for goods, reduced purchasing power, as well as hesitant growth of capital and earnings are some of the factors that can cause inflation. A rising unemployment index is another sign that inflation is coming.
Decrease in Market for Goods
This results from the low purchasing power of consumers. Consumers have low income due to decreased wages paid by badly performing businesses. They also tend to save more, as opposed to spending on goods.
Decrease in Stock Prices
This stems from the withdrawal of foreign investors due to the fear of a possible fall in currency value. Government policies also restrict portfolio investors from investing freely, and this may impact negatively on the country's stocks.
Declined Consumer Confidence
Declined consumer confidence stems from unwillingness of consumers to make purchases, causing manufacturers, retailers and wholesalers to lose sales. Consumers fear the possibility of inflation and cut down their expenditures. They also wait for price decreases and discounts in order to shop. Business owners cannot afford to offer them these promotional services, because they lack the financial capacity needed to do so.
Economic recession occurs when there is a decline in economic activities. In Malaysia, it could be marked by a decrease in employment opportunities and general loss of consumer confidence. Several sectors, such as the banking sector, agricultural sector, social sector, mining sector and small and medium enterprises, still remain resilient to crisis due to the partial immunity that their key resources get from their uniqueness.
The resources become readily available to these sectors, because major businesses withdraw from the market. The government also offers incentives to areas of the economy from where small-sized enterprises directly or indirectly derive their resources.
Recession can, however, cause inflation, which will lead to the loss of currency value, a massive decline in foreign and per capita income, a rise in poverty caused by decline in GDP, as well as decline in investment.
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