At last it would seem that the Malaysian Institute of Economic Research (MIER) has come to its senses. It’s now reading a different set of tealeaves. From all the shenanigans of the last few weeks, of opting and co-opting of politicians - thanks to the hair-brained strategies of PKR’s self-professed prophet Anwar Ibrahim - Malaysia is mired in political depression. It’s an abyss. And it reeks of political and moral double standards, maneuverings and outright lies. But wait: The economy will worsen the politics.

MIER now says that the Malaysian economy is teetering on the brink of recession. It is amazing, though, that it has taken the Kuala Lumpur think-tank this long to work this out. Several Malaysian private sector economists with whom I have been chatting were already working on recession scenarios for months. In fact many of us think that the Malaysian economy is already in recession.

Never mind the technical definition of what constitutes a recession and when it can be called one. It’s passé, for the most part. And nobody trusts the numbers given by the Malaysian government; they’re as rubbery as Burma’s or China’s. They’re easily manipulated to show anything you want. But Malaysia’s gross domestic product (GDP) has been slowing for months now, and the pace of slow down has picked up - substantially. In fact the economy started to ‘soften’ by the third quarter in 2008.

MIER’s data tells the narrative of an economy that has been falling increasingly behind the curve. No problems with that. The problem is that news or details of the last quarter’s economic performance is too often out of date when things on the ground are moving far more swiftly. And so the other problem becomes how to capture what’s happening now. But that’s another problem: Even if you manage to compile the data, by the time you write the narrative and put it out, it’s already out of date.

Business confidence also down

The Malaysian economy is already in recession. MIER’s indices of business and consumer confidence show this. Judging the size of crowds at hawkers’ centers won’t tell the full story, though. These places will somehow survive any recession. Their revenue may slow but they’ll survive because their food is cheap. But it’s the traffic at classy cafés and restaurants will give the full dimension of economic slowdown. So, too, Malaysia’s giant shopping centers. Watch that space.

Business confidence is down too, and that’s more the result of consumer confidence hitting the skids. But we have enough anecdotal evidence to say labor layoffs through Malaysia are rife - from multinationals and homegrown Malaysian conglomerates to small and medium-sized companies, especially in the states of Selangor, Penang and Johor - the country’s three most industrialized centers.

What we need to see is Malaysia’s industrial output numbers. If there is something like a producers’ index, whether manufacturing or agriculture, it’ll tell a far sharper story. The best we have in Malaysia is an index that shows such things as power (electricity) consumption by industry. By all accounts it’s down by 15% year-on-year. And that’s 15% off full capacity. It could, anecdotally at least, suggest that most manufacturing plants have pared back production, perhaps cutting back to two shifts from three, or one from two shifts. And that means shedding workers.

Anecdotally, Malaysia has been taking on more and more downside risks in manufacturing, almost all of which is export-driven. But most of Malaysia’s export markets have shriveled up. Even China. And against China, Malaysia’s competitive advantage is pip-squeak. In fact that is true of most countries now, especially as the Chinese state continues to repress wages and labor rights and scandalously manipulates its currency.

The backside of these downside risks is the state of Malaysia’s agricultural sector. Having redistributed large tracts of farm land to industry over the last three decades, Malaysia today is a net food importer. It even imports rice when once it was a net rice exporter, after the likes of Thailand and Burma. And what farm land that was left has been sold, sometimes forcibly or by crooked means, to large commercial businesses, or agri-business. Sime Darby is one.

But global commodity prices have been tumbling precipitously for months now. And that’s sure to hit the farm sector hard, with layoffs and under-employment becoming the bane of any state, let alone federal, government. Put the downturn in the manufacturing and agricultural sectors together and what you have is a political and social nightmare for the government. The Malaysian government will have to pay a political premium - inevitably.

The next thing to watch is foreign direct investment to Malaysia. If that tails off, or avoids Malaysia, then no amount of fiscal spending by state and federal governments, dubbed stimulus packages, will likely save the economy. We’re starting to see the first round effects of stimulus packages in the United States, Britain, Japan and Australia. All have failed to kick-start these economies, much less put a floor beneath them.

Malaysia’s last stimulus package, worth RM7 billion, announced in November last year, was not only a pittance but also a joke. It would barely make a dent. It won’t boost aggregate domestic demand - at all. The RM7 billion came from cuts to state subsidies. This will explain why toll charges are going up heftily. The government’s business cronies, especially in highway projects, are suffering loss of profit.

Twin deficit

There’s worse to come. Fiscal deficit, as a proportion of GDP, is set to rise well above 5%. There’s no doubt the Malaysian government will have to produce another round of stimulus package. It’s size will be double, even triple, the last one. It’s still unlikely to work. More, though, with export markets collapsing, and commodity prices falling, government revenue, on the whole, will be hammered from all side, including domestic taxes.

The size of the fiscal deficit could easily match its current account deficit. The terms of trade are no longer in Malaysia’s favor. Balance of payments is looking worse by the month. Malaysia will have to cut its imports (but will it cut its food imports?). If the world economy slumps into a protracted recession - and a recession far worse than anything Malaysia experienced during the Asian economic crisis in the late 1990s, or indeed anything since the 1930s Great Depression - then there’s a chance that, for the first time, Malaysia could be beset by a twin deficit.

Nobody ought to become complacent about the fact that a global recovery is imminent in 2010, or indeed in the second half of this year. That would be reading tea leaves again. This global economic collapse looks far worse than anybody dares to think. And it has a long way to go yet, with far more bad news to come from financial markets in the US and Europe, and possibly Japan and Asia. When one of the world’s leading banking story successes apologizes for previous sins and then says it needs to raise $US17.7 billion in equity, it says plenty about the wreck to come in the global economy.

Let’s be clear: Even Barrack Obama has yet to fathom the scale of the problems that are railing the US financial sector. So far he has produced only spin on what he will do. His all-talk treasury secretary Tim Geithner has still to tell the world the details of his plans to rescue the world’s biggest and most important economy. If China is holding out to the US to turn around, what chance is there for Malaysia to go it alone?