Category: Economics

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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

Categories
Economics

[2777] Rebasing, revision and GDP-ratio targets

From time to time, economic statistics get revised. Usually statisticians require a lot of time to compile data and in that mad rush, certain data could left out first and included only later when everybody gets a chance to reflect. There is nothing structural about the revision. It is just about errors, corrections and business as usual.

Other times, the revisions are more structural. Some are structural only because of definition change like what happened with the concept “external debt” last year. Others include very deep changes. An example of that is the GDP rebasing exercise and it affects policy targets.

The Malaysian GDP gets rebased once every five years and the exercise consists of two parts: rebasing and revision.

The rebasing itself is simply a manipulation of index but the more significant part of the exercise is the revision that include/exclude of new/old sectors. Strictly speaking, the change in the composition of the GDP is not rebasing but instead, it is a structural revision. It is really the revision that makes rebasing such a big deal.

The revision is a problem for any policy with GDP-ratio targets as it can make such targets quickly irrelevant. Since Malaysia structurally revises its GDP once every five years (for instance, from 2010 to 2014, the GDP base year was 2005. For 2015 till 2019, the base is 2010), any GDP-related target formulated in 2013 for instance could become problematic in 2015 when a new GDP series is used.

Here are two examples.

First is the 55%-to-GDP debt limit that the Malaysian government maintains. Notwithstanding the off-the-budget spending criticism as well as the fact that the limit itself is a paper tiger and assigned arbitrarily, the government promises to keep its debt below 55% of GDP. Previously, a lot of people were worried that the government would breach the limit. Not so much now and this is largely because of the revision.

As you can see, the old GDP series (with the 2005 base) has the government cutting it close but under the 2010 GDP series, there is a lot of space still for fiddling around:

Effect of GDP revision on Malaysian debt limit

The implication? It gives the government more room to borrow just because the GDP statistics have been revised upward while allowing the government to keep to its words.

Another example is the fiscal balance of the federal government. You can see, the Malaysian fiscal deficit ratio is slightly lower under 2010 GDP series compared to the 2005 series.

Effect of GDP revision on fiscal balance

The ratio changes are not trivial from policy perspective.

In the case of deficit, previously thought to be a severe policy under one GDP series might not be so severe under the other after all. For instance, the federal government recently revised its deficit target from 3.0% to 3.2%. But 3.2% deficit under the 2005 GDP series is harder to achieve than it is under the 2010 GDP series. If the government sticks with the 3.2% target after the rebasing/revision, then the government could have higher absolute deficit and actually borrow more than it would have if there was no rebasing/revision exercise.

To put it simply, the goal post moves and it becomes larger.

This is part of the reason why I prefer to target deficit on government revenue instead of  on GDP.

I suppose the other way to correct for this is to tighten those targets every time there is a rebasing exercise.

And there are other policies beside fiscal that look at GDP-ratio too.

I think the revision would become less of an issue if it is done every year. The problem with doing it once every five years is the sudden jump, which can throw a lot of targets into questions. Policymakers make targets simply on incomplete and dated data. In fact, any target made based on the status quo would be softer than it looks like.

A yearly revision would solve that and make any GDP-ratio target more robust.

Categories
Economics

[2775] Before you kick the low-tech sectors…

The idea that Malaysia needs to graduate from low-tech, low-skill sector to high-tech, high-skill sector is well-rehearsed. If you have been reading my blog long enough, you will know that I am not a fan of such narrative.

I consider it as a feel good rhetoric as if there is a switch somewhere that turns everything low-tech to high-tech where most if not everybody is a high-tech workers. I also think the narrative appeals to our xenophobia, peppering ugly racism with some kind of economic rationale as if it would make it less racist.

Recently, I came to think of yet another reason why I am opposed to the low-tech, high-tech story.

When you think of it, many low-tech sectors are the base of high-tech sectors. Without the unsexy low-base supply chain, the high-tech sector just cannot exist because these high-tech sectors depend on input of these low-tech firms.

Consider Penang with all of its Intel, National Instrument, Dell, Honeywell and many other so-called high-tech anchor companies. What support them are the smaller guys producing relatively unsophisticated components. Without these smaller guys, which are low-tech (admittedly, not as low tech as spinning cloth or harvesting the paddy field or palm oil, but low-tech nonetheless), these famous names would not be here in the first place.

If you forcefully kick these so-called low-tech out, the question is, where would the high-tech guys source their inputs? If they have to source it from abroad, would that increase their logistics cost? Would the high-tech guys move to where the inputs are?

Sure, we have a global supply chain but in many cases, like the auto sector near Bangkok and the electronics sector in Penang, it is the hubs that draw on local resources before joining the global supply chain. The existence of the hub depends on whether the economy can support it. It does not exist in vacuum. And it is the unsexy low-tech sector that provides the support the hub needs.

A lot of people who favor the narrative of low-tech to high-tech also forget in many ways, the low-tech sector is the incubator for high-tech firms. Many high-tech firms were originally producing ”stupid electronics”, the basic components that require only high school knowledge of physics, chemistry or general science. But they experimented later, turning themselves from dumb manufacturers through ”trial and error” to high-tech ones with actual ”research and development” arms.

Globetronics for instance used to produce just LEDs and ICs for Intel in the old days. I do not think anybody would dare call LED high-tech but it went on to support higher-value products for Intel. Now, Globetronics produces multiple components more complicated that ICs and LEDs, feeding other higher-value electronics manufacturers all around the world.

This is not only applicable to the electronics industry. I cited electronics because it is a large component of the Malaysian economy.

Other I can probably cite safely is the rubber industry, specifically glove manufacturers. I have never visited these manufacturing plants and you would think making rubber gloves are so low-tech, but I know equity analysts covering several Malaysian glove manufacturers and the name Hartalega pops up as a high-tech glove manufacturer, focusing on automation and productivity.

Also, there is a reason why these glove manufacturers are in Malaysia. Southeast Asia — Indonesia, Malaysia and Thailand — are the largest producers of rubber in the world. That is such a low tech.

In Sarawak where I was several months back, without passing judging on the politics there, many big local contractors were merely cheap builders meeting Cahya Mata Sarawak’s needs. Now, firms like Shin Yang, Naim and KKB are more than just that contractor some big guys would call for petty civil work. They are not exactly high-tech but the point is that they have graduated to do more complicated structures.

Like I said, low-tech is the incubator for high-tech sectors.

Besides, it requires a big investment and experience to run big high-tech. These people, a lot of people want to run before they learn to walk. We do not have to crawl and take a hundred years to get things right but these low-tech sectors are where we can do our trials and errors, before doing our “research and development”.

Categories
Economics

[2774] TPP is not just about the US

Among those who oppose the TPP in Malaysia, the US is on their crosshair, always. The opposition is so US-centric that I wonder whether they are anti-TPP, or anti-US. Malaysia has signed several other FTAs in the past years and negotiating more but you do not hear any complaint against those. Among the pro-TPP too, whether it is about trade or involving some kind of geopolitical babble, more often than not, it is about the US and sometimes about Malaysia too.

Yet, Malaysia is negotiating the TPP with 10 other countries and there is hardly any question asked about what these countries want out of Malaysia and what Malaysia would get out in return. Judging from various reports, it is quite clear that what Japan wants is very different form what the US wants, never mind the exemptions requested by all countries to accommodate their domestic political reality. But there are not many questions asked on this front.

Granted, Malaysia has active FTAs with six other TPP countries — Australia, Brunei, Japan, New Zealand, Singapore and Vietnam — through the Asean trade system. There is even one between Malaysia and Chile. The TPP could very well replicate those existing FTAs. But the question I would love seeing asked and answered is how TPP would change the existing ties. Is there any new special request between these countries?

And we know, the TPP has more depth than any of the previous FTAs Malaysia has signed.

What about others that we do not have a treaty with, like, besides the US, Canada, Mexico and Peru? We would have to discuss with them from the ground up. No, there is no question asked here too.

During the Malaysia-Singapore Retreat earlier this week, Singaporean PM Lee Hsien Loong mentioned the TPP. In this video, he mentioned it at 1:11:

That was a chance to ask specific Malaysia-Singapore issues within the TPP. But nobody asked them there. I do not even see any analysis about the TPP coming from the annual retreat.

So, I think this is the area where the debate in Malaysia at least should spread out to.