FIN657 Assignment 1 - Covid-19 is the new disease that has shaken the whole world. It is first infected PDF

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FINISSUES AND ETHICS IN FINANCEThe Impact of Income Shock on Consumption SpendingAmong Young Malaysian Household with Credit Usage inPost Covid- 19PREPARED BY:NUURUL FARHAANAH BINTI ZULKAFLISTUDENT ID:2018261384PREPARED FOR:ZAHARIAH BINTI SAHUDINSUBMISSION DATE: 23 RD OCTOBER 2020ACKNOWLEDGMENTFirst...

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FIN657 ISSUES AND ETHICS IN FINANCE

The Impact of Income Shock on Consumption Spending Among Young Malaysian Household with Credit Usage in Post Covid-19

PREPARED BY: NUURUL FARHAANAH BINTI ZULKAFLI

STUDENT ID: 2018261384

PREPARED FOR: ZAHARIAH BINTI SAHUDIN

SUBMISSION DATE: 23RD OCTOBER 2020

ACKNOWLEDGMENT

First of all, praises and thanks to the Almighty, for his showers of blessing throughout my assignment and complete the work successfully.

I would like to express my deep and sincere gratitude to my lecturer Dr. Zahariah Binti Sahudin for giving me the opportunity to de research and providing invaluable guidance throughout this research. Her vision, sincerity and motivation have deeply inspired me. It was a great privilege and honor to work and study under her guidance. I am extremely grateful for the offered me.

I would also like to thank you to my fellow classmate for the love and support to finish this assignment. they were always be patience and acceptance during the discussion on the assignment preparation. I wouldn’t be able to finish this without their help.

Furthermore, I am extremely grateful to my parents and family for their love, prayers, caring and sacrifices for the educating and preparing me for my future. They were always there for me during my difficult time complete this work. It is delightful to actually have people who always support me during my studies.

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TABLE OF CONTENT

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1.

INTRODUCTION

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2.

ISSUE

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3.

IMPACT

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4.

CONCLUSION

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5.

REFERENCES

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6.

APPENDIX

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INTRODUCTION

Covid-19 is the new disease that has shaken the whole world. It is first infected at Wuhan, China on December 2019 and starts spreading at the whole country that causes a million of death. On 24th January 2020, the first cases at Malaysia has been detected, ever since then the government has been working in respond to this outbreak. According to the article, Malaysian Institution of Economic research has predicted there will be a drop of the real GDP from 4.0 to -2.9% with more than 2.4 million job losses. During the MCO phase, the workers has reported to be out of work while some of them said their salary reduce by 90%. Since all citizen need to keep social distance throughout the effective period of the MCO, all of the individuals have been urged to stay home, minimize unnecessary travel to avoid the disease from spreading. The action causes many people were afraid to go outside and lead to fall in economic growth. As concern, Bank Negara Malaysia highlights that there should be a stimulus measure to increase the economic growth during the pandemic such as the continued progress of public projects and higher public sector expenditure. The government also announced economic stimulus package for RM250 billion to reduce the impact from covid-19 as well as restore the growth of Malaysian economic. Even so, the income receives through “Pakej Prihatin” was not enough for a couple months after the covid-19 crisis considering for the current state expenditure. ISSUE During Covid-19 pandemic, the expectation for income shock is degenerate due to the loss of job. Income shock is an uncertain event that will change the customer spending and economic growth. It is mainly caused by the loss of job, unemployment and salary cutting. This will cause to increasing in household debt and reducing the consumer spending. Since the MCO, there are many companies cannot operate since the profit is low considering the people is now rather stay at home than going outside. Meanwhile, the central bank said, in the manufacturing sector, prolonged plant closures in major industrial centers in COVlD-19affected countries disrupted production activities across the global supply chain. The country's economy will have a significant impact following global economic and financial conditions, which began to decline in the first quarter as the spread of the COVID-19 pandemic increased.

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The article state that there is 34% of reduction in consumption spending due to the job losses is equivalent to the income shock. Those who lose their job during the pandemic do not have enough saving for a month based on MUTC (Kongres Kesatuan Sekerja Malaysia). This is because more than 50% people in Malaysian does not plan for their emergency fund. This is known by the statement from institution such as PERKESO, which assigned to monitor the cases of layoffs for all country during the pandemic.

During the pandemic, many people are left unemployed according to the DOSM 2020. It is recorded rising from 3.3% to 3.9% since February and the following month 2020. Thus, the household debt is also increasing since the unemployment and household debt is positively related. Moreover, during the MCO, consumer spending is high since people need to buy household needs for their children and family. It is important to provide enough goods since people need to stay at home during the MCO phase. People who are unemployed basically have different strategies to fulfill consumption which for example delays in make a payment such as credit card balance and mortgage. Therefore, unemployment will lead to income shock during the pandemic.

Besides that, the problem occur due to the crisis is salary cutting. Since the nonoperating business were struggled to pay the rent and utility bills, they need to cut their employees’ salary and reduce the workforce to maintain their financial planning. This causes a huge impact in on the household debt, income and spending. They will be having a difficulty in paying expenses such as loans, that need to be settled.

IMPACT According to the article, studies shows that there is a huge increase in debt among Malaysian household since the MCO started in early March 2020. This lead to negative impact and build financial crisis due to the high level of household debt. The article stated that the Malaysia’s household debt reaches 82.2% of GDP at the end of June 2019. Based on the article, many of the Malaysia’s bankruptcy cases is high due to the lack in managing debt such as hire purchase transaction, personal loans, credit card debt, mortgage, etc.

Official Portal Economic Planning Unit recorded that there’s about 34% of young adult in Malaysia aged around 15 to 34 years and above. Purchasing decisions made by youngster are often influenced by their social network such as family members, friends and 5

social media. It has been the choice of consumptions in the generation determined by the social pressure. It is developed to boost their self-esteem, image and to be social accepted by others.

The compulsive spending and too many debts among the youngest these days are because of the social pressure and materialism. They are tempted with the modern world, shopping, special package that is given by the credit card companies. Their needs for selfsatisfaction cause the impact of over indebtedness that lead to high in interest charges and bankruptcy. The pandemic has changed the individual’s consumption pattern to mobility restriction that has been minimized due to the effect in income and economic. Compared to overall population, young household has greater impact with this outbreak. They have to face risk of unemployment, decrease in job opportunities due to the close operation in the MCO by the government.

According to the article, the impact of Covid-19 on unemployment among the employees around 40 years and below. This study reported that the teenagers and young household will not bear the income loss due to the excess level of debt and drop in financial cost. Furthermore, the young household claimed have the lowest income between the other group. It is more concern when the young household have to take care of their children which give them higher monthly expenses.

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CONCLUSION

The covid-19 disease spread rapidly that has changed the movement around the globe. The impact of the virus clearly reminds us to always stay gentle in facing any disaster. It is ripping all the fancy illusion of ours and display the value things of human life. Not everyone is ready for the test of this pandemic. The crisis had spill over impact that increase the downside risk of income shock on the household spending particularly on indebtedness. In return, the article is encouraged people to explore the conceptual framework of income shock related with young household indebtedness. Furthermore, the variables are measure and it is reported that income shock in Malaysia such as loss of job, high unemployment can be the factor to change the household spending in Malaysia. Moreover, the level of credit is concerned to avoid any losses that will affect the income shock. This situation is hoping that Bank Negara Malaysia Moratorium to decrease the burden and balance the household consumption spending.

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REFERENCES Adzis, A. A., Bakar, J. A., & Shahar, H. K. (2017). Factors influencing young adults’ debt in Malaysia. Journal of Business and Retail Management Research, 12(1). Khan, A. H. H., Abdullah, H., & Samsudin, S. (2016). The linkages between household consumption and household debt composition in Malaysia. International Journal of Economics and Financial Issues, 6(4), 1354-1359. Andersen, A. L., Duus, C., & Jensen, T. L. (2016). Household debt and spending during the financial crisis: Evidence from Danish micro data. European Economic Review, 89, 96-115. Ando, A., & Modigliani, F. (1963). The" life cycle" hypothesis of saving: Aggregate implications and tests. The American Economic Review, 53(1), 55-84. Azmin, N. A. M., Zaidi, W. N. W., & Mohamad, Z. (2019). The Determinants that Influence Household Debt Case in Malaysia. KnE Social Sciences, 1215-1226. Baker, S. R., Farrokhnia, R. A., Meyer, S., Pagel, M., & Yannelis, C. (2020). How does household spending respond to an epidemic? consumption during the 2020 covid-19 pandemic (No. w26949). National Bureau of Economic Research. Been, J., Suari-Andreu, E., Knoef, M., & Alessie, R. (2020). Consumption responses to unemployment shocks. Netspar Academic Series. DP01/2020-005

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APPENDIX

Link article: https://hrmars.com/papers_submitted/7505/the-impact-of-income-shock-onconsumption-spending-among-young-malaysian-household-with-credit-usage-in-post-covid19.pdf

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