If you’ve watched the preview of Paul Krugman’s online classes, you would’ve noticed him stressing the fact that – contrary to common belief – economics is not about money. It is about people, and it ends up looking at how people behave, e.g. how people earn a living and how they spend their income.

Unfortunately, a lot of times, however, human beings’ behaviour is unpredictable. This is because of the so-called high frequency of ‘immeasurable variables’ (or in a layman term, factors that shape human behaviour). This is why some regard economics as a dismal science.

Indeed, predicting the future path of the economy is an art in itself, not a science. Economists make anecdotal observations to judge how businesses are faring, how owners of businesses are feeling about their near-term prospects, and how individuals are reacting to their surroundings.

Relating to what we see around us these days, there are certainly signs of dark clouds gathering pace in the global economy. We read about trade tensions, the Brexit-related drama in Europe, as well as China’s weakening economic momentum. We come across the word ‘recession’ more often than before. In fact, based on a report, as at the end of 2018, the frequency of the word “recession” in stories on the Bloomberg terminal rose to its highest level since the start of 2017. Experience has shown that this “R” word is a pretty good indicator for major US recessions. So, we can’t blame people for feeling a bit gloomy.

But there’s a flip side to the story. Things may not look too bad in Malaysia, according to a number of economists. Even Bank Negara Malaysia (BNM) in its latest assessment on the economy (Economic Report released on 27 March 2019) is expecting decent economic growth in 2019. Yes, it is below Malaysia’s trend growth, but there will not be a sharp deceleration. Growth will remain at between 4.3% and 4.8%.

Of course, there is another camp, i.e. the pessimists. They are insisting that the world around us will materially affect our economy this year. BNM statistics are showing that export growth will be halved to 3.4% from 6.8% last year. This is to be expected – we observed that the trade momentum has taken a turn for the worse since the third quarter of 2017. The RWI/ISL container throughput in major global ports, a high-frequency metric, has softened from its peak in the third quarter of 2017. Its growth essentially turned negative in February 2019, plunging from its high of 8% in September 2017.

But domestically, the economy is still in pretty good shape – at least at the aggregate level. The majority of economists are still looking at respectable growth numbers, especially for private consumption (a term commonly used for consumer spending). Consumers are the champions of the Malaysian economy. Their expenditures are seen to remain above 6%, thanks to a relatively strong labour market. We owe it to them for helping place the headline growth number at its current position. In 2018, for instance, their spending contributed about 90% to overall growth.

In spite of this, we need to zoom in beyond the aggregate level. One question that pops up in the minds of economists is whether there are possible cracks in the consumer segment that we have overlooked at this juncture. Here are some points to consider. While total household debt remains on the decline, the financial health of the vulnerable group – defined as those earning less than RM5,000 per month – is slowly becoming a contentious issue. Incidences of default among borrowers in this group, as a ratio to total personal financing, was roughly 27% in 2018 – almost double that of the average borrower. This could have important implications, considering that about 50% of total outstanding personal financing is held by borrowers in this vulnerable group.

Keeping in mind Malaysia’s median household income at approximately RM5,200 per month (according to 2016 household income survey), we can more or less assume that a sizeable number of households have personal borrowings. That said, if the economy takes a sharper-than-expected downturn, they will be most affected, unless they have sufficient financial buffers. There’s a bit of good news, though. At a macro level, liquid financial assets look respectable. However, we do not know its distribution. We only know the distribution of household liabilities.

Again, putting aside the performance of the overall economy, one could ask: how do people and businesses feel as a whole? For this, businesses’ hiring plans could provide some hints on how they view their prospects. For instance, the latest survey by the Department of Statistics in the first quarter of 2019 indicated that 8.5% of business establishments in Malaysia predicted an increase in the number of employees, while 5.0% predicted a decline. This means that more establishments are keen to hire workers in anticipation of better business prospects. That left the so-called ‘net balance’ of 3.5%, lower than the peak of almost 22% registered in the third quarter of 2017.

Another survey by Vistage-MIER shows the top-line CEO Confidence Index also declined by 13% in the first quarter of 2019, from its peak registered in the third quarter of last year. Its ‘expectation of future economic conditions’ component fell for the second consecutive quarter, while ‘expected change in employment’ and ‘planned fixed investment’ dropped for the third straight quarter in the first quarter of 2019.

It is also critical to observe how investors react in the financial market. By looking at their reactions to current developments, we can get an idea of how investors perceive Malaysia. A case in point: the ringgit has strengthened by 1.3% so far this year, with the inflow of foreign funds partly explaining the ringgit’s strength. This is good news. In the first two months of the year, there have been net fund inflows worth RM2 billion into Malaysia’s bond market – a significant improvement from last year’s net outflows of RM22 billion. In the eyes of foreign bond investors, Malaysia is again becoming an attractive investment destination.

Nonetheless, the equity market is flashing a different signal. A report from an investment bank research indicated that Malaysia experienced net foreign outflows to the tune of RM1.7 billion from January up to the first week of April this year, the highest among the four ASEAN countries in its coverage. So, there are some mixed signals in the financial market.

There will be challenges going forward, no doubt. But most of these are very much related to what is going on in the global economy. As such, other regional economies will also be affected. But the silver lining is that Malaysia is working hard to address structural issues in the economy, the most crucial of which is the huge debt accumulated over the years. Household indebtedness is also being studied closely, while various measures are being considered to mitigate rising living costs.

We are indeed living in interesting times.

This article was first published in The Edge Malaysia Weekly dated Apr 15, 2019 – Apr 21, 2019.