Disputes in financial markets because of COVID-19

Disputes in financial markets because of COVID-19

 Chapter 1 (Introduction)

1.1 Background of the study

Consumer spending behavior has long been a focus of research from various fields of education over the years. Consumer behavior encompasses the study of consumer and the processes which involve the obtaining, using, experiencing, disposing of goods, and the factors that led to their purchase decisions (Perner, 2010). There was not an absolute definition of consumer behavior in this ever-changing consumer world. Consumer behavior is a wide field of study which integrates various fields of studies such as biology, psychology, economics, and chemistry (Radu, 2019).

It is believed the outbreak of COVID-19 has caused significant disruptions globally, as lockdown measures take place around the world, which limits the chances of conducting business. Industry disruptions are especially magnified in specific industries, such as the airline and entertainment industries. In a survey conducted by The McKinsey and Company in different countries such as the United States of America, Germany, Japan, and South Korea, it is found that consumer consumption has rapidly declined in industries such as the travel and transportation, apparel and entertainment industries, specifically the firm industry (Jones, 2020). Such a drastic decrease in expenditure will inevitably cause significant disruptions towards the profitability of the sectors, which will have a substantial impact on the income level of those working in these industries.

In an economic sense, consumer spending is gauged by combining all private expenditures on durable goods, nondurable goods, and services (Chappelow, 2018). It is reported that the consumer spending level of Malaysian has dropped substantially in 2020, from RM214678 million in the fourth quarter of 2019 to RM212257 million in the first quarter of 2020 (Trading Economics, 2020). According to Lee Heng Gui, the executive director of Socio-Economic Research Centre, private consumption in Malaysia is expected to decrease at a rate of 1.5 to 2% in 2020, contrary to increases in past years (Kana, 2020). It is believed that by researching the factors leading to consumer behavior changes, we can have a rough idea of the trends and levels of consumer spending in a nation in the future. Subsequently, the prevalence of COVID-19 has a significant impact on global economies and financial markets, which are reflected by the history of low-interest rates and weak financial market sentiments. It is reported on the 5^th of May 2020 that Bank Negara Malaysia has cut its overnight policy rate to 2%, reflecting its lowest point since 2009 (Ong, 2020). Besides, the Kuala Lumpur Composite Index has slumped to an 11 year low of 1219.72 points on the second day of a movement control order on the 20^th of March, which further supplemented the idea of changes in consumer sentiments (Tan, 2020). It is also believed that COVID-19 has a significant impact on the unemployment rate around the world. The Governor of Bank Negara Malaysia, Datuk Nor Shamsiah Mohd Yunus, said that the actual unemployment rate might exceed the previous forecast of 4%, owing to the extended movement control order and current weak market demands (Yi & Lin, 2020). The unemployment rate has also been on the rise on a global scale. For instance, there is a sharp increase of 9.8% in the United States’ unemployment rate since the outbreak in February, which is equivalent to 15.2 million U.S citizens becoming unemployed due to COVID-19 (Bureau of Labor Statistics, 2020). Subsequently, the International Labour Organisation has suggested that one in six younger adults has halted their daily work routine since the beginning of the outbreak.

In contrast, the rest has experienced significant cuts to their work time (Hutt, 2020). Relatively, nations of Southeast Asia have also experienced a substantial increase in the unemployment rate since then, notably Thailand, Laos, and Vietnam. As a nation that relies heavily on tourism, Thailand is expected to suffer the highest decline in its GDP in 2020 compared to other ASEAN countries, as the tourism sector takes a huge blow. All these have highlighted the impact of COVID-19 on the financial and economic prospects of nations around the world. People are earning lesser than ever; some even lost their jobs. It is believed that this will project towards a significant decline in consumer spending. From this, we are curious about quantifying the impact of these alterations on Malaysians’ spending behavior.

History has also proven that people’s spending behavior would change in the face of a financial downturn (Nistorescu & Puiu, Marketing strategies used in crisis – study case, 2009). Consumers would generally evaluate and react to the changes in business and economic situations around them and adjust their spending accordingly. Therefore, this research will be focused on curating the impact of a few financially and economically driven factors on consumer spending behavior, in the context of COVID-19. It is believed that the outbreak of COVID-19 has shed light on a few financially driven factors such as changes in income level, volatility in the financial market, and access to credit facilities. While Malaysia is experiencing a recession currently, it will be interesting to discover the impact of the changes in these aspects on consumers’ subsequent purchase decisions.

1.2 Problem Statement

Technically, a recession could be defined as a decline in economic growth in two subsequent quarters. However, there were modern debates about the true meaning of recession. Some suggest that recession was not merely represented by the decline in the gross domestic product but incorporates various other macroeconomic factors such as employment rate, industrial production level, and many more (Chappelow & Barnier, Guide to Economic Recession, 2020). It is undeniable that COVID-19 has caused major disputes in financial markets on a global scale, indicating a highly likely recession in the following months for Malaysia. As reported by Bloomberg, Mohd Uzir Mahidin, a top statistician in Malaysia, has forecasted a significant slowdown in the following four to six months (Low, 2020). Bloomberg’s gross domestic product tracker has suggested that a global recession is already on the track back in March (Hanson & Orlik, 2020). This evidence further strengthened the point that COVID-19 became the main trigger of the ongoing global recession, as the most significant wave of infection of COVID-19 originated in March

.

Since mid-March, Malaysia has initiated the movement control order since then, and the Malaysian economy has severely contracted and experienced a sharp downturn. Since the implementation of the MCO, domestic industrial production has fallen 4.9% year-on-year in March (Cheng, 2020). It is further evidenced the significant impact of COVID-19 together with lockdown measures on the Malaysian economy. Apart from not being able to go out to make purchases, the recession that has brought upon by COVID-19 has also severely impacted consumer’s spending levels. As industries face a significant decline in revenue, it is typical for the general income level of the population to have a massive cut. Moreover, the government has started giving incentives to the lower 40% of Malaysian by initiating the Bantuan Prihatin Nasional scheme, and overcrowded AKPK (Credit Management and Counselling Agency) as more and more people face the possibilities of bankruptcies in the face of the pandemic (Hamid, 2020). Given all these facts, we can ascertain that COVID-19 has caused significant disruptions on Malaysians’ income levels. Do the changes in income level have a substantial impact on the changes in their spending behavior during this pandemic?

It may be evident that the outbreak of COVID-19 is the main factor that deals with the most substantial impact on Malaysians’ spending levels. This research vows to review this phenomenon in a smaller context. Therefore, few carefully selected financially and economically driven variables will be used to predict the changes in consumer spending behavior, notably changes in income level, the volatility of the financial market (interest rates, stock market performance), and access to credit facilities. It is believed that these are the three most prominent factors in causing a change in consumer spending behavior, in the context of the current pandemic. It will be interesting to see the changes in consumer spending behavior in the present context as compared to when the previous financial downturn or recession periods. Besides, it will also be noteworthy to see how access to credit facilities in relieving consumer’s current consumer demands, and will it be significant enough in predicting their spending behavior.  Given this rare context, it will be interesting to see how consumer spending behavior will adjust according to the pandemic’s impact on their daily lives. It is important to note that a consumer is affected economically and psychologically during a financial crisis, as they tend to evaluate more before making a purchase (Mansoor & Jalal, The Global Business Crisis and Consumer Behavior: Kingdom of Bahrain as a Case Study, 2011).

For instance, the financial crises in 1997 and 2008 have had a significant impact on the Malaysian economy, which has likewise has influenced the family sector. Malaysia has undergone a recession in 1998, which witnessed a 6.8% decline in the economy, implying the worse we had experienced since 1985. Due to the uncertainties of the financial market due to wildly fluctuating exchange rates and weak external and internal demands, private investment has declined substantially (Ariff & AbuBakar, 1999). During the financial crisis in 2008, the global stock market capitalization has dropped from $53 trillion in 2007 to only $29 trillion in 2008, declined by 45% in total. Weaker consumer sentiments were also reflected by declining and housing prices, complemented with 3.1 million job losses (Bank Negara Malaysia, 2008). There is enough evidence that shows the financial crisis in 1997 and 2008, respectively, which has a significant impact on our nation’s consumption level. We can derive a pattern of consumer spending behavior from these times of crisis. However similar, it is also essential to acknowledge that the nature of the current COVID-19 led financial crisis is somewhat distinctive from those in 1997 and 2008. For instance, there were no lockdown measures during the past financial crises, and this may create a substantial impact on the spending level of consumers now.

The trigger of each financial crisis is also unique on its own. Besides, it is hard to distinguish the effect of variables and economic policies taken by the government to handle the financial crisis that impacts the patterns of family utilization consumption. Along these lines, the change in family unit utilization in Malaysia is critical to decide the best numerous linear regression model for planning purposes (Ramli, Hashim, Mahdinezhad, & Norasibah, 2017). Additionally, the recognizable proof of the most significant components that had affected family unit utilization use in Malaysian between 1970 and 2014 was imperative to get a picture of the economic situation of families. Planning family use is essential to address the issues of buying for goods or services that are accessible in the market. Therefore, every household’s objective is to satisfy their fundamental needs, such as food, clothing, shelter, vehicles, transportation, and education. The size of the family unit’s financial level has improved fundamentally as of late, as reflected in the extension of the family’s advantages and liabilities. The structure of the financial standing in family units also changed, with the higher property of financial assets and properties. There are two significant patterns in the family’s financial level in Malaysia.

1.3 Research Question

1. Does income level affect the spending behavior among Malaysian during the outbreak of COVID-19?
2. Does access to credit facilities affect the spending behavior among Malaysian during the outbreak of COVID-19?
3. Does the volatility of the financial market affect the spending behavior among Malaysian during the outbreak of COVID-19?

1.4 Research Objective

1. To measure how income level of Malaysians affects their spending behavior during the outbreak of COVID-19.
2. To measure how access to credit facilities affects Malaysian consumer spending behavior during the outbreak of COVID-19.
3. To measure how the volatility of the financial market affects the spending level among Malaysians during the outbreak of COVID-19.

1.5 Significance of the Study

The coronavirus (Covid-19) has a wide-reaching impact on online business, innovation, business travel, and the economy (Mohammad Waliul Hasanat, 2020). Today, the world is confronting the pandemic upheaval of ailments. Many Physicians-Scientist are endeavoring to discover the measures which can either prevent or fix these diseases. In any case, we are still lagging in either way. The most significant path through which we will be able to check these diseases is by doing research. In any case, as far as we could know, there has not been any previous research conducted in Malaysia that focuses on the impact of economic and financial conditions on consumer behavior among Malaysian during the outbreak of COVID-19 using the perspective of planned behavior. This study intends to fill this gap. People live unexpectedly, purchasing distinctively and from multiple points of view, thinking unexpectedly. Supply chains are challenged in this trying time. Retailers are shutting doors. Buyers around the globe are taking a gander at items and brands through another focal point. The infection is continuously reshaping the business, quickly accelerating long-term underlying trends in the space of insignificant weeks. This research indicates that new propensities formed currently will suffer past this crisis, permanently shaping what we value, how and where we shop, and how we live and work (Wright & Blackburn, 2020).

Consequently, this investigation offers a severalfold commitment to various groups of people, including consumers, investors, business people, economists, grocery suppliers, and the government. Moreover, every nation follows the lockdown strategies as a method of preventive measures, and Malaysia has likewise implemented the equivalent. It seems that both the private and the public sectors are impacted heavily because of this infection. The outbreak of the COVID-19 pandemic has not just brought about extraordinary contaminated cases and demise across the globe but also significantly affected the worldwide economy, reflected by significant job losses (Guangwu Chen, 2020). The truth of the matter that the impact of novel coronavirus will significantly affect the nation, economy, and society is unavoidable. The expanding threat of novel coronavirus is a general wellbeing crisis and hampers the entire economy. For some, China is the universal focal manufacturing center. Hence, any interruption in China’s yield will have serious repercussions (Meyer, 2020). The online business thinks it is hard to sell their items on the web and confront enormous issues while sourcing their items from China. China mainly deals with machinery, hardware, instruments, and communication-related equipment. Any interruptions in these areas will influence other nations’ business. Similarly, the Malaysian market is likewise reliable upon China’s market, and it has profoundly affected Malaysia’s economy (Mohammad Waliul Hasanat, 2020).

Further, the lockdown has also blocked the import and export facilities in the nation. Everything was affected by the coronavirus, notwithstanding to online business, the automotive, metals items, chemicals, communication hardware, elastic, plastics, and office machinery segments equally experienced disruptions. Numerous online organizations are confronting deficiencies of the items which cannot satisfy the demand of the customers. They may likewise be raising the price of the items in the coming futures in the wake of everything recovers.

Additionally, online businesses are attempting to handle the circumstance. Take up the case of Amazon, they do not just arrange with one nation, but they deal with other countries as well. Most of their dealers are from China. Other online businesses are likewise going to feel the pressure of their supply crunch soon (Matt Craven, 2020).