Category: Economics

Categories
Economics

[2800] What is the fiscal deficit status now?

Back in January, the official deficit projection for 2015 was revised up by the government to 3.2% of GDP from 3.0% due to the falling energy prices. I concluded then the new target was achievable if government revenue would increase by at least 1.2% YoY. It was a reasonable target eight or nine months ago.

Unfortunately, a lot of things have happened since then and that 1.2% YoY revenue growth does not look easy anymore. That means, the current deficit target seems incredible now.

I have updated my sensitivity analysis. I think the fiscal deficit this year will likely be around 3.5%-3.9% of GDP. I did a tighter projection for work but I can afford to cast a wider net here.

Below is a table of deficit-to-GDP, dependent on revenue and NGDP changes this year. I have highlighted several cells in red corresponding to my expectations.

2015 Fiscal deficit sensitivity analysis

The assumptions (projections?) are:

  1. 0%-2% revenue contraction
  2. 4%-5% NGDP growth.
  3. For government spending growth, I imputed 1.2% YoY into my model, which is the exact increase the government announced from its budget revision back in January. I do not expect any spending cut due to… hmm… some political imperatives and I suppose, Keynesian tendencies within the government. I am unsure how the Monday announcement would affect spending as details are scarce so far but my gut feeling says it will not matter.

The weaker revenue is mostly due to depressed petroleum tax collection, lower petroleum royalties and lower dividend. I am a bit unsure how other taxes, especially company and individual income taxes, will change. But what we do have is the first half data and individual income tax collection is already down by 33% YoY, partly, I guess, because of the earlier tax cuts. Company income tax collection rose strongly however, increasing 43% YoY but judging from earning reports so far, I think the second half will be very different.

The 1MDB Minister Prime Minister Finance Minister will table the government budget on October 23. We will know more then.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — It would be interesting to compare current assumptions with past ones:

  1. My current expectation is based on 1.2% spending growth, 0%-2% revenue contraction and 4%-5% NGDP growth. These are part of the three assumptions listed above.
  2. Back in January 2015 during the revised budget, the assumptions were 1.2% spending growth, 1%-2% revenue growth and 4%-5% NGDP growth.
  3. The original 2015 official projection, shared in October 2014, was 3.2% spending growth, 4.5% revenue growth and 9% NGDP growth.

You can see the drastic change in projections and assumption since October 2014. Maybe a table will be clearer for comparison:

Malaysian deficit ratio target change

Categories
Economics

[2791] Frontloanding theory confirmed for 2Q15 GDP

Apart from the slowdown in consumption, I was wrong. The Malaysian GDP grew 4.9% from a year ago, considerably higher than what I thought it would be at 4.1%-4.2% YoY. Still, economic growth is decelerating quite drastically.

Malaysian GDP growth

Trade surplus did not improve as exports contracted worse than imports, and not the other way round as I wrote previously. Service trade and price factors have something to do with it since trade values published monthly had suggested otherwise. I had naively taken the number without taking into account export and import prices.

Meanwhile, investment growth crashed, becoming much weaker than what I expected. The Pengerang project has not created much dent yet.

But the two big things that caused me to miss the actual growth figure are inventories and government spending. I should have raised my inventory projection when the industrial figures come out respectably okay but the pessimistic me refused to do so. And I had expected with all the rage for deficit targeting, government expenditure would have taken a big hit (yes, I know the GDP government spending does not correspond exactly to actual federal government spending and there are other states’ government spending to account for). It grew in annual terms instead.

The thing that was really hard to get it wrong was consumption. The GST collected its toll. It was a stark slowdown, growing only 6.7% YoY after the 1Q15 8.8% YoY spike. Domestic demand growth decelerated to 4.6% YoY from 7.9% YoY in the same period.

A lot of people had expected a dip after the spike and they were right. The frontloading theory is right.

That has led me thinking about how much did consumers stock up on their foodstuff and other typical consumer non-durable goods. None of us has a warehouse to store a whole year worth of supplies.

This is a hard and important question. Whatever the answer is, it is the key to knowing when will spending normalization take place. When it happens, I think it is reasonable to expect a massive spike in consumption, at least on quarter-on-quarter basis.

If I had to guess, the normalization would probably start this quarter. We could see complete normalization by the end of the year.

Still, preempting the typical data for 3Q15, this quarter would likely be weak too and I feel we would only start getting better in 4Q15. The GST impact itself should be gone completely by 2Q16, if only because of mathematical artifact.

Categories
Economics WDYT

[2790] Guess the 2Q15 Malaysian GDP growth!

The Malaysian GDP figures for the 2015 second quarter will be out next week on Thursday.

I think it will be bad because of how the GST has hit consumption. This will be the focus next week as people write out their commentary. I am a believer of the frontloading theory but admittedly there are some problems with it as I have highlighted yesterday: consumption imports have been growing strongly much against expectations.

The trend in trade is not great either. The funny thing is trade surplus is improving in the quarter. The widening is not something to be celebrated however. Imports raced against exports to the bottom. Imports won that race no thanks to weak consumption.

The industrial index has been doing quite well despite the gloom all around. That is another funky stats that refuse to line up cleanly. The excellent EconsMalaysia believes it is really inventory build-up. That hypothesis can easily be assessed with the GDP figures.

I think, the only real good news will come from investment, especially with the Petronas Pengerang project down south. I have been there myself and it is truly massive. Still, I struggle to think of any other new big public infrastructure project that started recently. I have not heard any large scale work for the Pan-Borneo Highway despite earlier fanfare. MRT and LRT are old news. New water treatment plant? Ask Selangor. New power plant? Ask 1MDB. There are some (an understatement?) residential construction in Danga Bay but…

I could talk about inflation but with the GST in the way, it is hard to be confident about the exact CPI message. My core inflation is out of whack. The Stats Department produces a seasonally-adjusted CPI series but I have no learned to trust it just yet.

On the balance, I think our GDP growth for 2Q15 will probably be in the region of 4.1%-4.2%. I think there is an upward risk with the the weirdness in import composition and the industrial index.

What do you think?

How fast do you think did the Malaysian economy grow in 2Q2015 from a year ago?

  • 0%-2.0% (6%, 1 Votes)
  • 2.1%-3.0% (17%, 3 Votes)
  • 3.1%-4.0% (28%, 5 Votes)
  • 4.1%-4.5% (39%, 7 Votes)
  • 4.6%-5.0% (11%, 2 Votes)
  • 5.1%-5.5% (0%, 0 Votes)
  • 5.6%-6.0% (0%, 0 Votes)
  • Faster than 6.0% (0%, 0 Votes)

Total Voters: 18

Loading ... Loading ...
Categories
Economics

[2789] What happened to second quarter consumption imports?

There is something quite weird going on in the imports data.

In the last quarter, we all know we had GST for the first time. It replaced an older consumption tax. After all have been said and done, the effective rate was higher than it was under the old regime. That means higher tax. You could also see it in the inflation figure that hit 2.4% YoY in May from almost 0.9%% in March when retail petrol prices took a dive.

There were concrete proofs of frontloaded purchases happening from the 2015 first quarter GDP statistics. From the 2014 fourth quarter even. Consumers did buy everything to avoid paying the new consumption tax. It happened on a scale grander than the ridiculous lines formed at the petrol station each time a price hike was announced. The GDP consumption component rose 8.8% from a year ago in 2Q15 at a time when credit growth was very weak. Bank loans used to increase more than 10% YoY each month. Now, it is about 9% YoY. All those lending requirement tightening are working.

201508GDPCvsLoanGrowthMalaysia

There is not much correlation from the chart above but the theory is, weak credit growth should affect spending growth negatively. Less money for everybody. The GDP consumption spike is jarring in that aspect, lending credence to the frontloading theory.

If the theory is right, we should see considerable weakness in private consumption growth in the second quarter. And there are quite widespread anecdotes of weaker consumer activities all around. Some statistics like car sales are extremely weak, providing more concrete proof to rely on.

On the surface, merchandise imports data suggests the same thing. In terms of value, it fell 5.2% YoY in the second quarter. In term of volume stripping off the price effect of depressed commodity prices like crude oil, gas, palm oil and rubber, it fell about 4.8% YoY in the same quarter.

So far, so good for the frontloaded purchase theory.

But there is a wrinkle.

Malaysia is a huge trading nation and it is an integral part of the global supply chain. We import not just end goods but also intermediate goods used for the production of other goods. Some are reexported.

Deep down beyond the import headlines, we can see some of these at work. The cause of import contraction however does not seem to be weak consumption growth. In fact, imports of consumption goods have been growing strongly despite the GST in the second quarter (and also despite the weakening ringgit).

201508consumptionImportsJune2015Malaysia

I cannot drill down the category too deeply. So, I do not know the exact reason behind the increase in consumption goods. I have heard explanation that goes like this: the imported stuff were really luxury goods and demand for it had not really let up, suggesting a tale of two classes in Malaysia. But I do not know for sure.

The second quarter GDP numbers will be out next week. Perhaps that would provide some answer to the puzzle.

Categories
Economics

[2779] Household income distribution from HIS 2014

The Department of Statistics has just released the 2014 Household Income Survey. I feel the survey is more comprehensive than the last one, although there are still a few improvements I would like to see made.

Anyway, with the release, I thought I should update an old chart I drew some time back.

Here is the latest household income distribution according to income brackets. One household comprises of 4.3 persons.

2009-2014 income distribution by income groups

I will not go deep into it at the moment but I am bit curious at the strength of income growth since 2012. Specifically, I am thinking of the pace at which share of the lower brackets has come down since the last survey.

I am less puzzled by the 2009 level because a recession happened that year. Growth tends to be stronger post recession, versus other times, under normal circumstances/recovery.

I am thinking of correcting the charts for inflation later. Maybe that would make the three-survey comparison better and make the distribution less surprising.

Yes, I know that the media has reported earlier that the median has grown to RM4,858 in 2014 from RM3,262 in 2012. But it was only after I saw the graphical representation that I realized how strong the growth was, which in turn, made me skeptical.

If you are interested in the full spectrum of the 2014 household income distribution, here it is:

HIS 2014 full income distribution by income groups