Economics WDYT

[2918] Guess the 2Q20 Malaysian GDP growth

We are back and tomorrow, the Department of Statistics Malaysia will be releasing the second quarter GDP figures. Without further ado…

How fast do you think did the Malaysian economy expand in 2Q20 from a year ago?

  • Grew by more than 0% (0%, 0 Votes)
  • Contracted by 0.1%-2.5% (9%, 2 Votes)
  • Contracted by 2.6%-5.0% (13%, 3 Votes)
  • Contracted by 5.1%-7.5% (17%, 4 Votes)
  • Contracted by 7.5%-10.0% (22%, 5 Votes)
  • Contracted by 10.1%-12.5% (17%, 4 Votes)
  • Contracted by more than 12.5% (22%, 5 Votes)

Total Voters: 23

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And… what. A. Ride. It. Has. Been. Politics. Economics.

The result is… there is no doubt the second quarter GDP figures will be terrible with a capital T. The question now will be by how much, and for how long.

The problem for the past perhaps 6-7 months has been the unreliability of statistics. Many statistical causal relationships depend on stable correlation. The supply-side shock has changed those relationships and there is a good risk those relationships are broken for good. In the aftermath of the 1990s Asian Financial Crisis for instance, economic growth rate has slowed in the decades after. This recession, the worst since forever, could do the same for various macroseries.

That, I think is how important the past months have been to Malaysian economics.

Now to the statistics.

Industrial production had taken a blow for the whole quarter. However in June, it was almost back up to pre-shock level. Almost, although I feel it is unclear whether a big chuck of the back-to-normal is due to old production lines coming back up, or some sectors overperforming. Or just factories trying to make up lost time (or just goddamn rubber gloves… joking). I write so because mining (with its perpetual supply disruption; investment is needed there to upgrades those facilities) and electricity production are not there yet. But for manufacturing, it shot up quite strongly. But overall, they are bad numbers, and increasingly less.

Similar observations for exports and imports. Both June exports and imports had jumped from May, but for imports, it has not returned to pre-crisis level yet. Not close at all. Imports are important numbers because it is a proxy to consumption and weak June imports suggest domestic consumption will remain weak going into the third quarter. Retained imports mirrored overall import figure: meaning a majority of imports recovery, if it could be called as such, was due to re-exporting activities.

As for inflation, I do not know what it shows with respect to demand. With fuel prices down so much, I think inflation is a bit of a whack as a signal. Core inflation also is not very helpful, which suggests it needs to be improved. For what it is worth, inflation is in negative territory, but I would not call it deflation.

Unemployment rate is another iffy indicator. It has surged, but in June, like other figures, it has become less bad by a margin. But as somebody on social media mentioned, the composition of unemployment might be different now, with more lower quality employment coming in. I would quote him directly I suppose because the way he put it is more eloquent than me (translated roughly):

Unemployed pilots, engineers and other professionals working as food deliverers should not be considered as employed. [@The_Eddie. Twitter. August 11 2020]

Here is where underemployment figure would shed light on the matter. DOSM did report it once several months back in the form of working fewer than 30 hours per week. But we need more regular reporting on that front.

So, until tomorrow…

Economics WDYT

[2865] Guess the 4Q17 Malaysian GDP growth

It is the final GDP release before the year goes to the dogs! The Department of Statistics will announce the fourth quarter figures tomorrow at noon. Before that, let us play a game:

How fast do you think did the Malaysian economy expand in 4Q17 from a year ago?

  • 4.5% or slower (13%, 3 Votes)
  • 4.6%-5.0% (13%, 3 Votes)
  • 5.1%-5.5% (22%, 5 Votes)
  • 5.6%-6.0% (43%, 10 Votes)
  • 6.1%-6.5% (0%, 0 Votes)
  • Faster than 6.5% (9%, 2 Votes)

Total Voters: 23

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For some context, the year 2017 was a pretty good year for GDP growth. It came after a pretty bad two-year period that in large part caused by the GST-shock to the economy.

But the fourth quarter growth is unlikely to be faster than the 6.2% yearly expansion we experienced in the July-September period. The third quarter was the peak and it was extraordinary. Even the 5.8% year-on-year growth in the second quarter now seems slightly on the high side.

You could see that industrial production has taken a break from the pace it grew for much of last year. Hot export and import growth are tapering off, with the volume index growing at a more modest pace now. There will be no more double-digit growth in the near future. Improving foreign exchange rates for the ringgit (with the exception against the Euro) will also keep export growth from flying off as it did from December 2016 to November 2017. Money supply growth is stabilizing after climbing for much of 2017 from a trough.

Change in government spending would be super-interesting this time around since the general election is just around the corner. Other GDP components like consumption and investment would likely expand at a rate not too different from the recent quarters.

Whatever the fourth quarter GDP growth would be, the first nine-month strong growth has translated well in the labor market. Seasonally-adjusted unemployment rate fell to 3.3% in December after staying at 3.5% for the longest time. So, consumption growth seems sustainable and okay in light of labor market improvement.

This happens at a time when core inflation has also fallen, suggesting potential output for the economy may have risen up, which is good news. As a result, unemployment rate could probably drop further with little impact on demand-pull inflation. I think this may also mean another rate hike by the central bank might be unnecessary this year, if things go as it is now.

Oh, happy lunar new year. Given how things are happening with the dogs here in Malaysia, I already cannot wait for the year of the pig. Too oinking exciting.


[2579] Far higher potential output for Malaysia?

Both the GDP and the CPI numbers for Malaysia were released yesterday.

Real GDP growth grew by 5.4% in the second quarter from a year ago. Although I suspected that growth would be strong due to strong showing in the industrial production index, I found 5.4% as surprising still. It was too strong for whatever the production index was showing.

The strong growth, along with low unemployment rate, provides a puzzle when it is considered together with inflation trend. Inflation in Malaysia, both headline (1.4% in July from a year ago) and core (1.3%) inflations, has been decreasing since the beginning of the year. Typically, strong growth creates demand-pull inflation. That demand-pull inflation has been absent in the second quarter despite strong GDP showing.

Furthermore, the unemployment rate has been low and I tend to consider the current rate to be quite close to the idea of full employment.  The latest employment rate, which is for the month of May, is 3.0%. Previously, the rate hovered between 3.3% and 3.1%. Labor participation rate is also quite high given historical standard. The assumption of full employment implies the economy has been working close to its full potential. Any growth stronger than the potential will put upward pressure on prices.

Yet, inflation, especially core inflation, has been decreasing throughout the year.

This may suggest that the potential output is higher than the growth the Malaysian economy has been experiencing so far. It also suggests that the already low unemployment rate can go down further and that we are not really that close to full potential.

So, Malaysia can grow faster still, which is an exciting realization. I heard of the go-go 1990s. Maybe, it is time for the go-go 2010s in spite of everything. Let us just hope things will not go down in flame like it eventually did in the 90s.

Whatever it is, if growth so far has been unsustainable, then inflation should accelerate in the near future. If it is sustainable (i.e. actual growth is lower than potential), we should see only limited demand-pull inflation.

Finally, I previously projected the Malaysian economy to grow by 4.0% for the whole of 2012. I am looking like a fool now and will be looking to upgrade the growth rate soon. Nevertheless, I am ultimately skiddish about that upgrade. Although domestic demand, which grew by 12.0% year-on-year, has proven to be capable of cushioning the adverse impacts from weak exports, the global risk is still there. Trade has not collapsed but it can and if it does, an upgrade will be a very foolish thing to do.


[2548] One way which minimum wage increases unemployment rate

One impact of minimum wage is the general increase in labor supply in the market. Let us be clear and not talk too generally or loosely. Precision is key. I think if you cannot be clear, then it is very likely that you do not understand or have not thought of the issue well enough. And I think I understand it very well.

And I apologize if this appears to use a lot of jargons. I try to explain each jargon but I believe you will be able to overcome the jargons if you are really interested in the issue; if you really interested in the issue of minimum wage and not merely interested in the ideological battle, then you have to understand the mechanics. There is no short cut. Besides, the jargons are really self-descriptive.

And this is not a moral argument but rather it is the mechanics; just as explaining why the sky is blue does not make any moral argument, so is this.

So, here is the precise simplified mechanism: labor supply will increase if the newly instated minimum wage is higher than most of the prevailing wages. Higher wages attract workers into the labor market thus increasing the labor force/supply.

At the same time, minimum wage puts a limit on total jobs growth. Walter Williams has explained how that is so. Williams explains it in a specific context, but the logic can be generalized beyond the competitive context that Williams describes.

Now, combine the two effects related to labor supply and total jobs growth.

If you understand how unemployment rate is calculated, then you will realize how this will increase unemployment rate. For the uninitiated, the unemployment rate is calculated by taking the ratio of total unemployed individuals to the total labor force.

This is of course is not the general effect between minimum wage and unemployment rate, but part of that effect is explained by this particular interaction between variables.

This is how minimum wage, jobs and labor supply interact.

If total filled jobs grow faster than labor force, then unemployment rate will decrease.

If total filled jobs grow slower than the labor force, then unemployment rate will increase.

With minimum wage, there will likely be a shock to both total jobs and labor force growth. Since minimum wage puts a cap on total jobs growth and at the same time encourage more individual to join the labor force, there is a strong case to expect total jobs growth will be slower than labor force growth at the time when minimum wage is in force.

That will cause the unemployment rate to jump up. That elevated unemployment rate will remain at its new high level, discounting for other effects, until further development happens.

These other effects may increase or lower the unemployment rate on the balance. One factor that may blunt the effect of minimum wage on unemployment is inflation.


[2513] Minimum wage and the money illusion

In the short run when (nominal) prices are not so flexible, there will be a trade-off between (nominal) minimum wages and unemployment rate. The mechanics is simple. If businesses cannot change the price they charge their customers, they will optimize their cost. Since a person’s real wage theoretically equals the person’s marginal product of labor (or in English, productivity), businesses will try to maintain workers whom are reasonably productive with respect to the wage paid. In reality, this could mean either tighter selection of workers or even firing of unproductive workers. More often than not, it would likely only lead to tighter worker selection criteria. Regardless, with labor population growth, it would lead to lower hiring compared to pre-minimum wage and then immediate creating  greater unemployment among the labor force, with all else being constant.

In the long run when prices finally adapt, the relationship between minimum wage and unemployment can be rendered impotent. Prices adapting means erosion of minimum wages by inflation. The more prices adapt, the less productivity is required given the equivalent fixed minimum wage level. This thus opens up more space for less productive workers to have a shot at employment in sector which the minimum wage law covers and in turn, applies a downward pressure on the unemployment rate.

Unless, of course, if the minimum wage level is updated in line with some measure of inflation. In that case, the negative relationship within minimum wage and unemployment rate will be sustained.

There is one important point that I wish to highlight if it is not so apparent already. While the negative relationship between minimum wage and unemployment will weaken over time in the face of inflation and non-update of the law, the effect of unemployment is real due to sticky prices in the short run.

With a real minimum wage, the effect is permanent.