Category: Economics

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Economics

[2736] House price growth is collapsing! Just kidding

If you have been following the Malaysian House Price Index published by the National Property Information Center (NAPIC) in the past few years, you would probably have seen some sharp drops in house price growth. You would think, all the government and the central bank’s initiatives were working well.

But if you were really paying attention to it, you would notice that the series has been suffering from drastic revisions since 2010. You would realize the revised drops were shallower than before, or it was not really a drop at all. Which makes me unsure about the effectiveness of all those tightening by the authority.

I have noticed this for quite some time now but it was only recently that I decided to look into it. And true enough, the latest data point from the index usually underestimates the rise in prices. Or more accurately, the preliminary reading underestimates the final data.

You can see the difference between the revised data and the preliminary data below (red is the revised/actual  index and blue is the series if there is no revision at all):

20140602 MHPI

The revised series is just the latest series available from NAPIC, which is reproduced by Bank Negara Malaysia in its Monthly Statistics Bulletin. For the unrevised data series, I had to go through old databases maintained NAPIC and the central bank and collate all preliminary readings for each quarter.

You can see how drastic the revisions can be from the chart above. If you like numbers, the root mean square deviation for 2003-2009 is 0.9% while the average RMS for 2010-2013 is 3.3%. I chose 2003-2009 and not earlier because earlier unrevised figures are somewhat unreliable because they were not published every quarter.

The drastic revisions give a very wrong impression of reality (assuming the revised series gives the right version). That may sound obvious but if you know nothing of the revisions, the series may scare you. In 1Q13 for instance, you would see a sharp collapse price growth, which would probably push homeowners into panic mode (see the blue series below):

20140602 MHPI comparing indexes

If pre-revised data is to be believed, house price growth slowed to 6.0% YoY in 1Q13 vs 12.2% YoY in the previous quarter. The end is near, one would say. Finally, BNM tightening were working, you would say. But after revision, growth was at 10.7% YoY (the short red line in the second chart), much higher than the preliminary release.

From the look of the revised index, house prices growth are decelerating, but only slowly.

More importantly, since the preliminary data is subject to large revisions, there is essentially a 6- or 7-month recognition lag. It is only after 6-7 months that you can say something about house prices with great confidence from reading this index. If you do not have the patience, then the only thing reliable from the preliminary data is the direction of change.

Categories
Economics

[2735] How has the deficit cut drive affected the GDP?

The Malaysian federal government appears committed to cutting its fiscal deficit down to 3.0% of NGDP by 2015 (from 3.9% in 2013) and then balancing it by 2020. I think the 2015 target is achievable, especially with the GST coming in next year. As for the 2020 goal, that is far into the future to matter right now (in any case, I am a bit skeptical).

The deficit is slowly coming down. Sure, the expanding NGDP has helped a lot in bringing the ratio down but yearly government expenditure in 2013 did grow only 0.4% YoY, in contrast to the double-digit yearly growth seen recently. You could see it from the annual deficit in absolute terms. It was MYR43.8 billion in 2010 and in 2013, it was MYR39.5 billion.  There is seriousness in the deficit cutting exercise, even if it is a recent phenomenon.

The seriousness however may bring another problem.

The combined government spending and government investment (public GFCF) figure has been growing pretty slowly. I would not call it austerity like some have. That is just loose talk. But still:

growth public sector

We do not really see the effect of slower public spending-investment growth on the RGDP headline in 1Q14, which grew 6.2% YoY, partly due to a low base effect (I think if you somewhat control the base effect, real growth might come out to 5.3% YoY, which is okay). Exports have been recovering strongly and that hides the weakness in government-related GDP components. Government-related components, make about 20%-30% of the total GDP.

Not that I am advocating more government spending. But if you are worried about just the headline growth regardless of its components, then this should probably bug you.

The strong export recovery also hides a weakening private consumption expansion caused by the subsidy rationalization exercise, which is a bigger issue. Private consumption makes up 60%-70% of the GDP. It grew slower from 7.4 YoY in 4Q13 to to 7.1% YoY in 1Q14. The 7.1% YoY is not a bad growth but it would likely decelerate further, with more subsidy cuts seem to be on the way as well as that expected benchmark rate hike. Also, the 2H13 private consumption growth rates were pretty high: it would be hard to maintain the same rates unless the consumers and the private sector get some big break. A break would mean no more subsidy cut for the year.

In short, the strong export recovery would probably hide the slower expansion experienced by the domestic GDP components in 1Q14.

Exports would like continue to grow for the rest of the year, but I am unsure how it well it would carry the whole economy when the other pistons are having issues (and one purposely being suppressed).

Categories
Economics

[2732] One-time versus repeated-game views on inflation and consumption

There is a curious logic going in the market and I am guilty of it myself. I only realized of my contradictory views only after I read a view claiming deflation encourages consumption spending (Austrians…) and asked myself a few questions about inflation/deflation.

To properly highlight what I see as a contradiction, answer the following question: does inflation discourage consumption and spending?

Keep your answer in mind.

Now, answer the next question: does deflation encourage consumption and spending?

The two questions are deeply connected with each other. They are the two sides of the same coin.

If you answered yes for the first question, your next answer should be yes if you’re consistent.

If you answered no for the first, you should answer no in the next.

I had answered the first question in the affirmative: yes, inflation discourages consumption. That I think is the market view in Malaysia right now. Ask economists in the financial sector and that would likely be the answer.

When I asked myself the second question, I immediately answered no when if I was consistent, I should answer yes. The answer no is probably the monetarist in me screaming, “what kind of question is that?” It is a reflex and it does not even go through my brain.

To address the two questions, I assume wages do not change. It is a simplification to make the analysis clearer. Adding wages will not change the analysis much but only complicates the explanation. Besides, you can always rely on wage-price spiral logic to control for wages although, with stickiness especially in times of deflation, it does present a problem. But that appears off-tangent for this entry of mine today.

So, with that out of the way, the yes answer is relatively easy to justify:

  1. If inflation is the reality, then you would feel poorer. You could afford to buy fewer things.
  2. If deflation is the reality, then you would feel richer. You could afford to buy more.

But it is not that simple. The set of answers (inflation discourages spending, deflation encourages it) is only applicable for one-time game/statics. For a more dynamic situation, the answer would be the reversed:

  1. If inflation is the reality and you know inflation would remain in the foreseeable future, then it makes sense to consume now. You know that if you do not and you save it instead, the real value of your savings will diminish no thanks to rising price levels. In an inflationary environment, savers get screwed. Sure, that does depend on the interest rate on savings but inflation is still bad for savers. It is the complete opposite for spenders. In inflationary times, it is better to spend. In Malaysia, you are already losing out if you save in a fixed deposit, if the consumer price index as the benchmark of inflation. Interest rate on 12-month deposit is 3.15% in February. Yields on one-year government bond is 3.05%. Compared that to about 3.5% YoY CPI inflation in the same month. It is a bad time to save. If you do want to save and make sure your real savings do not diminish, you have to reach out for the yields, investing in some mutual funds or even go straight to the stock market.
  2. The reverse is true for deflationary environment. You know prices are falling down and the rational thing to do is to delay your consumption to later and later so that the prices of whatever you will be consuming get cheaper. You should prefer to save because with each day prices fall, your savings will become more valuable. Deflation is really good for savers but bad for spenders. Such situation depresses spending as people prefer to save.

My problem here is that I have accidentally mixed the two views (half one-time view and half repeated game view) together and I think the Malaysian consensus has done the same too. I do not think professional economists would think deflation is good for consumption growth. I think I am right to say that there is some consensus among economists, at least in the financial service circles in Malaysia, that the rising inflation now, more or less meaning the rising cost of living, is hurting private consumption. At my work, we have a propriety index that suggests discretionary spending is growing slower and the slowdown is coinciding with the subsidy cuts that are causing the rising domestic inflation. Bank Negara Malaysia, the monetary authority, has incorporated weaker domestic demand into its 2014 projection too. It is hard to think of anything else that is causing the weaker consumption. You could say it is caused by the government fiscal consolidation but that is exactly being operationalized through the subsidy cuts, mostly.

I see the contradiction but I have trouble reconciling them.

And I think this is a serious contradiction. These are not policy entrepreneurs-lobbyists with limited training in economics. These economists know their economics and the contradiction exists. Why?

Is there something that I missed?

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
Further reading maybe:

The Euro area inflation came lower than expected in March and this has raised concerns about deflation (or “lowflation” as labelled by the IMF). In today’s Financial Times, Jurgen Stark, a former ECB board member argues that deflation or low inflation is not a problem. One of his arguments is that there are benefits for low inflation, in particular:

“It is likely we are living in an extended period of price stability. This is good news. It boosts real disposable income and will eventually support private consumption.” [Antonio Fatas. The Price is Wrong. April 14 2014]

Categories
Economics

[2727] Income distribution of Malaysian households, 2009 and 2012

I just felt a need to update my old post on household income distribution I put up back in 2012.

Here are the distributions (the categories are based on households’ monthly income. A household is roughly defined as a family of four, with two working adults):

household income distribution

You could see some improvement from 2009 to 2012, but it is really hard to see from here whether that improvement was due to secular factors, or just that the base was bad (due to cyclical factors). I suspect it was largely cyclical. The year 2009 after all was a recession year. I detest measuring almost anything starting from 2009 for almost every purpose.

I could compare both years to an older dataset to determine if there had been substantial improvement. I think I will do it later. And probably, control for inflation too.

I obtained all data from the Department of Statistics’ Household Income Survey, 2009 and 2012.

I had to do some data manipulation here because the 2012 data has fewer income categories than the last one.  This affected income categories from RM5,000 to RM10,000 the most. I had to average out the older categories and fit it into the new ones as used in the 2012 survey so that I could make an easy comparison.

I have to add, I am quite disappointed that the Statistics Department abolished the old categories and even lumped some categories together, like the categories for those making above RM10,000 per month. It makes the distribution a bit unnatural.

More importantly, there is a loss of information, although I am sure the Department of Statistics has it. It is just that they are just not sharing it publicly. You can see the relative richness of the 2009 survey below compared to the 2012 edition (the red bar below is the 2009 median):

Income distribution of Malaysian household from Household Income Survey, 2009, the Department of Statistics

Categories
Economics

[2726] The Big Mac Index is not about cheap burgers, NST

The Big Mac Index is one of those funky things in the world of economics that a lot of people think they know about it, but they actually do not. The New Straits Times on Saturday featured the  Index in a big way to show that Malaysia has the third cheapest Big Mac in the world.[1] Unfortunately for the newspaper, in doing so, it proves to the world that they do not know what the Index is about. And they did that in a grand style, by putting it on the front page.

The Big Mac Index by the Economist does have a list of Big Mac prices from a number of countries. But the point of the list is not to aid burger hunters searching for the cheapest Big Mac in the world. Rather, the point is to give the readers a feel of how overvalued or undervalued a currency is, typically against the US dollar (these days, the Economist has introduced multiple other reference currencies).

The Index is designed to demonstrate a theory called the purchasing power parity. The PPP, although not exactly the Law of One Price, pretty much operates on the same logic the Law of One Price operates. If the PPP holds in the world of Big Macs, then all Big Macs would cost the same. When there is divergence in prices between two… national… burgers, then it suggests that either one or the other is overvalued or undervalued.

So, if Malaysia does have the third cheapest Big Mac in the Index, what the Index is telling you is that the ringgit is the third most undervalued currency in the Index (against the US dollar, the reference currency).

The NST seized on the word cheapest to give an idea that it is cheap to live in Malaysia. “Malaysia has been ranked one of the cheapest places in the world to purchase a Big Mac,” goes the very, very bad article. In a companion article that is equally awful:

Independent economic macro-analyst Prof Dr Hoo Ke Ping said while it was true that some might find prices of food items to have risen somewhat, Malaysians should be thankful that they can still enjoy relatively cheap meals compared with other countries.

He said the Big Mac index was proof that essential items in the country were still relatively cheaper than other countries.

“Although some prices of food items, petrol and electricity have gone up, our prices are still cheap.”

Hoo said it was a misconception that prices of essential items had gone up, adding the speculation was sensationalised, over-hyped and not fully defined. [Big Mac index an accurate indicator. New Straits Times. February 15 2014]

You get the idea what the NST is trying to say. It is really a propaganda hack and not actual news. NST itself has no understanding of the Index, much less of the PPP. It does not care about the economic rationale behind the Index. NST is only forcing the economics to fit into the paper’s preferred narrative, which is horribly flawed.

As for the professor, I present to you, a big chart of the monthly YoY changes of all of the major components of the consumer price index throughout 2013:

big ass chart

Please do not tell me that the prices of essential goods have not gone up (no, I am not referring to the alcohol and tobacco component although I do understand, those are essential items for some people. For the majority, look at the rising food and more jarringly, transport inflation).

Now, it may or it may not be cheap to live in Malaysia but using the Index to demonstrate that is just not the way.

To make that argument on living cost, you need to make at least one more step and that is to find the income of the median Malaysian. From there, you can calculate just how many burgers that Malaysian can buy with his or her salary. Compare that to the same metric in another country and only then you can say whether it is cheap to live in Malaysia.

The way the reporter writes it, it is cheap to live in Malaysia if you earn in stronger currencies like the US dollar, which is true and you can definitely know that from the Index.

But most Malaysians do not earn in dollar. That fact really makes the NST’s argument irrelevant.

Finally:

Accountant Muhammad Aiman Sofian said lower salary levels in Malaysia meant that the ratio of expenses to income was smaller compared with other countries. [Big Mac index an accurate indicator. New Straits Times. February 15 2014]

You have got to be kidding me… that just goes against empirical evidences from all around the world.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR: MALAYSIA has been ranked one of the cheapest places in the world to purchase a Big Mac, according to The Economist.

The British news magazine’s annual “Big Mac” Index, which gauges if global currencies are at their correct level, has ranked Malaysia third behind India and South Africa as the cheapest place in the world to purchase the McDonald’s signature burger.

“The price paid for a Big Mac in Malaysia is RM7.40, which is equivalent to US$2.23 when converted using the global exchange rates.

“This amount is lower when compared with the actual price of a Big Mac that is sold in the United States for US$4.62, indicating a 50 per cent difference.

“In other words, the Big Mac sold in Malaysia is half the price of the same burger sold in the US,” the magazine revealed.[Malaysia is 3rd cheapest place to buy a Big Mac. New Straits Times. February 15 2014]