[2919] Supply-side recovery and demand-side recovery

Despite the deep second quarter GDP contraction for Malaysia, monthly data suggests the economic situation is sitting somewhere between “becoming less bad” and improving. The new monthly GDP (April, May and June 2020) estimates shared by the Department of Statistics suggest the recesssion is becoming less bad from year-on-year perspective (it is impossible to independently verify the Department’s assessment because the monthly series is not available publicly). Industrial data suggests production is returning to pre-crisis level. Unemployment rate is coming off its peak but it is important to state that there is still a long way to go toward pre-crisis average.

The improvement has led to the narrative that we are recovering fast.

But as mentioned before, there are two types of shock at play in this recesssion: supply shock and demand shock. So when we talk of recovery, I think it is important to note that we need to complete two recoveries before we can confidently claim we have come out of the overall economic crisis.

At the moment, we can safely say we are recovering from the supply-side crisis. Some damage has done to the economy from the supply perspective but if things continue to proceed as it is, the overall industrial production would return to its pre-crisis level in the coming months. Somewhat full recovery from the supply-side would likely be possible once the partial domestick lockdown is removed, with the borders opened. The earliest that would happen is likely January 1 2021. Full recovery will depend on our major trading partners aboard, some of which are not doing too well.

In contrast, I think it is much more difficult to say whether we are recovering from the demand-shock, with some statistics possibly becoming unrealiable (a question of quality versus quantity, like the one besetting the unemployment rate calculation). This is where we should turn our attention to now.

To graphically represent that I am thinking about the two shocks, I have produced a chart.

The solid blue region represents the GDP (output), with Point 100 indicating the maximum production under normal times for convenience’s sake. There are 11 time periods from 0 to 10. Period 0 is pre-crisis. For each time period, output depends on two shocks: supply (pink) and demand (yellow).

From the chart at time Period 1, I am showing the GDP contracting due to a massive sudden supply shock. But beginning Period 2, the supply shock begins to be removed from the equation and as a result, the GDP is improving rapidly (for Malaysia, that comes in the form of successfully addressing the Covid-19 infection and lifting the full lockdown). But the supply shock simultaneously generates a demand shock. But the latter shock is more persistent than the supply shock, lasting longer in the following time periods. Our supply shock has a mechanical feeling to it. You know what is going on and if the supply shock gets removed, things would rapid go back to normal. But the demand transmission is more complex and this lies the danger of believing in a V-shape recovery.

One point I want to highlight: while the supply-driven GDP contraction is much, much bigger than the demand-linked contraction, under normal times, such demand-contraction would be considered as serious (with the superlarge numbers we have seen during the Covid-19 crisis, it is easy to lose track of “normal” perspective).

The next critical points for demand-side will be end of moratorium on September 30, and December 31 when the wage subsidy program will expire. I think these two measures have prevented the supply-shock from fully being translated into a demand-shock. The end of the two measures would remove the barriers. Those dates would likely negatively affect income level and unemployment, which would translate to spending.

So, as a summary: the so-called rapid recovery is largely due to the supply shock removal (both successfully addresssing Covid-19 infection and lifting the full lockdown). And it is unclear yet to me if we have begun to undo the demand shock. At the very best, we have only partially delayed it.

Earthly Strip Economics

[2913] The Earthly Strip: Mak Cik Kiah’s recession

And The Earthly Strip makes a return.


[2803] Troubling tales from Uber drivers

Unlike cabbies whose occupation is mostly driving (save for the minority), most Uber drivers drive part-time. I have had engineers, civil servants, doctorate students and advertising people as my Uber driver.

That occupational diversity makes conversation during an Uber ride much more interesting than that during a typical taxi journey. I have heard fascinating tidbits across industries as Uber transports me around Kuala Lumpur. This makes Uber a gold mine for economic anecdotes, giving colour and warmth to hard cold data.

These conversations have turned depressing lately.

The economy is going through a rough patch and official data tells you just as much. No citing of how well Malaysia ranks in the WEF Global Competitiveness Index — an index that does not measure economic cycles — can overcome concerns over the economy at the moment.

We are not in a recession but recession as a concept can be a statistical abstract. I would suppose in personal terms, you are in a recession if you lose your job and then struggle to meet your financial obligations. It is within this context my Uber conversations took place.

The worst stories almost always come from oil and gas professionals. With low petroleum prices and spending cuts by Petronas, the whole Malaysian oil and gas sector is in a recession of their own.

This has led one geologist to drive Uber. He used to spend months at sea and all around the world on lucrative contracts looking for oil and gas for big companies. But he has not been out of Kuala Lumpur for a while now. There is no new contract to sign. Nobody is exploring anymore.

Petroleum professionals like him are used to big pay and those in the industry did appear to be among the best paid compared to the rest. And this geologist in particular was used to big spending. He bought a property in a good neighbourhood along with a car last year through bank borrowings. Then, the repayment seemed insignificant.

But the times are changing. With no job on the horizon and no money coming in, his personal finances are not in a great shape currently. He is not alone. ”My friends are trying to rent out their places. They did not need the money before but now every cent counts,” he insisted.

I fear what this portends. These are highly qualified and well-paid members of the middle class. Upper middle class perhaps but they are now at risk of losing that status.

There has always been somebody struggling with their finances even during good times. But the idea a person with a fine education such as the geologist could fall so far down so rudely because of something out of his control made me shrink in my seat as he drove me towards my destination.

There might be some comfort the petroleum industry employs just a small segment of the Malaysian labour force.

Yet, it is not the only one in trouble. Retail is not doing well too. It is unclear if the tough time there is temporarily caused by the GST or due to something bigger and more lasting. Meanwhile, euphemisms like downsizing, voluntary separation scheme and ”having to let you go” are making its rounds in the banking sector.

Another sector I have had anecdotes to share is advertising.

One person running a small production house told me he drove Uber because there were fewer and fewer advertising jobs available for grabs these days. ”In tough times,” he said when the lights were red, ”businesses would cut advertising spending first. It is the easiest thing to do for them.” Indeed advertising expenditure has fared badly so far, contracting 9 per cent in the first eight months this year compared to 2014.

Before we parted ways, he joked driving was his full-time job now judging by the hours he spent on the road instead of at the desk doing creative work.

I only hope these are mere anecdotes.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on October 29 2015.


[2630] Pegging debt forgiveness to the pace of Greek reform would be better

The Economist supports further debt forgiveness for Greece to get Greece out of the economic disaster it is in now.[1] I support such move. It is essentially a default, but making it consensual between the creditors and the debtors will be important in maintaining some kind of stability in the market.

The forgiveness will definitely free up resources for the Greek government. Even right now, just as The Economist wrote, Greece is increasingly unlikely to repay whatever it owe without resorting to the debt market. Besides, as The Economist pointed out in the same article, more than 70% of Greek debts are owned by European governments and the ECB. Given that these governments as well as the ECB are in it together with Greece if they want to maintain the integrity of the Eurozone, they should take further haircut. The ECB has been adamant about not suffering a haircut, but I think that is an unfair uncompromising position given how private bondholders had agreed to a haircut themselves. Why should the other sector be any different?

Right now, Greece is utterly dependent on bailout money from the Troika to run its government. The bailout money has been the carrot for various necessary reforms in Greece. The Troika wants Greece to execute those reforms before releasing the bailout money. With the Greek tight on money, bankruptcy looms.

If it was not for all the European complications, an outright default would have been the best way forward. It is clear that Greece cannot pay whatever it borrowed and the world might as well accept it and more on. Greece will undergo severe pain (it is already there anyway) but at least, it would have smaller or no debt at all after that. Greece can start afresh.

I think, the best is for the Troika, the government creditors as well as the ECB especially to peg debt forgiveness with the pace of reform, just as The Economist proposed. That would be better than pegging the bailout money to reform. Bailout money only increases the burden of debt for Greece and I am unsure how that would help in the long run. Considerable amount of government revenue would continue to go into servicing those old and new debts and only limited residual resources would be available for Greece to invest in itself. A debt relief program may enable Greece to invest in itself and carry itself out of the hole sooner than the ongoing bailout program can.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — A GENERAL strike; protesters on the streets; parliamentary battles over austerity measures needed to unlock rescue funds; and a sinking economy with an ever bigger debt burden. The situation in Athens this week is grimly familiar—and not just because Greece has had so many similar weeks over the past couple of years. There are also eerie echoes of the developing-country debt crises of the 1980s and 1990s. [The Economist. How to end the agony. November 10 2012]

Economics Entertainment

[2603] A theme song for our recession

If there was a theme song for every age, I think I would like this as the theme song of our Recession.