Category: Economics

Categories
Economics

[2696] Good news is bad news and bad news is good news

This is truly a bonked up world. Sometimes it is as if humanity as a whole does not really know what it really wants. No, what it wants, what the market wants, is to have its cake and eat it too. Ever since quantitative easing became orthodox monetary policy, signals have been mixed up that it confuses the whole market.

Take QE for instance and its effects in Asia. Experts were worried that the expansive monetary policy in the US and more so in Japan these days were fueling asset inflation in across emerging Asia and elsewhere. There is also effectively a manipulation of exchange rates even if it is unintended and done indirectly (do not call it competitive devaluation!), which helps the export sectors of economies which are committed to QE. Those who see their currency appreciating by too much blame QE.

But now that the Federal Reserve Chairman Ben Bernanke said will end when the economy recovers, the equity markets of the whole world are tanking.

From 10,000 feet high, the ridiculousness comes in the form that good news is bad news and bad news is good news. The exact reason for the end of QE is a recovered economy. Judging by the equity and bond markets’ response to Bernanke, it seems that those markets are afraid that the market is recovering.

This highlights how QE has truly detached from the real economy.

As a digression, that does not mean that the QE is not working. It merely means that QE has caused these markets to be divorced from the so-called Main St. The real economy in these QE countries with its high unemployment rate and stuff clearly does not go in tandem with equity market. In the same line, I am the accusation that “Abenomics” has failed only because the Nikkei has jumped off the cliff as missing the point about the function of QE. The QE remains an expansive monetary policy aimed at improving output and not pushing the stock market up, however the function of the stock market as a leading indicator. The fact that the stock market and all of those investment papers are not part of the GDP calculation only stresses the actual intention of QE.

Looking closer, the detachment is understandable I suppose. It is a world of cheap money where the transmission of monetary policy is imperfect. Not all of those money get to the real economy, however it lowers long-term borrowing costs.

Anyway, in non-QE countries, oh, boy! It is almost like a boom. Domestic demand is strong, the stock market goes crazy (relatively because, when the KLCI is compared to regional bourses, all one can say is meh) and yields are so low that it makes sense for the government like Malaysia to expand its borrowing.

But now with the speculation of a tapering and Bernanke’s statement of the end of QE, the same those who complained about asset inflation are panicking, begging, Ben, please, don’t send the ‘copher back home. Stock market is down, yields on government bonds are up and the ringgit got spooked.

And yes, who can forget the craziness of the Treasuries are an insurance to its own downgrade? The magic of reserve currency!

Oh well. Just another day in this crazy world of ours.

At least gold is going down and I am extremely delighted of that. And that is not crazy.

Enough ranting. I have work to do.

Categories
Economics

[2689] Dear soon-to-be minister, it is y-o-y, not q-o-q

The soon-to-be Minister in the Prime Minister’s Department overseeing the Economic Planning Unit Abdul Wahid Omar commented on the 1Q real GDP growth earlier this week. He said:

”The gross domestic product (GDP) growth for the first quarter was a bit slow, but that’s reflective of the economic activities which are typically slower (in this period),” Wahid said. [Liz Lee. Wahid: M’sia growth prospects still bright, will be driven by Govt identified projects. The Star. May 21 2013]

That is untrue. He has very likely confused his base.

It is true on quarter-on-quarter basis that 1Q tends to grow slower than the other quarters but the 4.1% is not measured on quarter-on-quarter basis. Instead, it is measured on year-on-year basis which pretty much controls the seasonality that bedevils quarter-on-quarter measurement (by the way, seasonality makes unadjusted quarter-on-quarter measurement unhelpful in most cases).

If you take a look for the past 11 years or so, there is not enough evidence to show that it is typical for year-on-year growth of 1Q RGDP to be slower than other quarters. You can see it for yourself:

20130522GDP1Qtypicalgrowth

In fact, the more than 10% growth that some BN politicians liked to crow without contextual understanding happened in 1Q2010.

I hope whatever he said to the media was an honest slip of the tongue mistake. Otherwise, his term as a minister will be full of statistical controversies.

Categories
Economics

[2688] Quick reaction to 1Q2013 GDP figures: bad but not that bad

The GDP growth for the first quarter in 2013 is bad. The economy in the period grew by only 4.1% from a year ago, which is a marked slowdown from 6.5% year-on-year growth in the fourth quarter. Despite the high 6.5% growth, the fourth quarter GDP figures were problematic. An anomaly pushed the growth in that quarter up.

The latest quarter has no such anomaly and so, the headline number does a better job in describing the economy this time around. Just to give context how bad the number is, the market had expected growth to be above 5.0% year-on-year with the median as compiled by Bloomberg being 5.5% year-on-year. You can compare the latest growth rate to previous rates in the chart below; 1Q growth is the lowest since the fourth quarter of 2009 which was right at the tail end of the 2009 global financial crisis.

1Q2013 real GDP

Just earlier, France officially went back into recession with Germany barely grew after having its economy contracted in the last quarter.

Indeed, the reason for the slow growth was net exports. It was down by 36.6% y-o-y in real terms:

1Q2013 net exports RGDP

Of course, this is not the first time net exports dropped like a rock from the 7th floor. With Europe and China in trouble, exports have trouble growing. If it was not for strong growing demand from Southeast Asia and the United States, it would have been far worse.

But there is some good news. Private consumption growth accelerated to 7.5% year-on-year from a low 6.2% year-on-year. Domestic consumption growth was very much supported by consumption growth; domestic consumption growth accelerated to 8.2% year-on-year from 7.8% year-on-year.

The fact that consumption has been strong is partly the reason why net exports dropped. Consumption growth means import growth and boy, did imports grow.

I am not sure why consumption grew as it had grown. The way I looked at it, imports of consumption goods and industrial production were bad. I had expected consumption to not perform as well as it had. What was it? Minimum wage? Cash transfer? I did see MIER’s consumer sentiment spiked up but that does not explain much. I hope somebody else would be able to enlighten me on this.

Another thing that came as a surprise to me is the practically non-growth of government expenditure. I had expected all those heavy electioneering to boost government spending but it did not. In fact, government spending dropped in nominal terms! It may appear that the government may be on target to reduce the deficit ratio after all. Hurrah!

It will be interesting to see the actual federal government expenditure number later on, which is different from the GDP component.

As for investment, it was high and that made it hard for it to grow any faster. There was a one-time jump and that was it:

1Q2013 GFCF RGDP

That one time jumped led to the 26.6% year-on-year jump in 2Q2012. Investment growth has been stuck at that level ever since. The next quarter… or rather this quarter, faces the risk of investment contracting, unless there is something big coming in our way. I do not see anything big coming in the second quarter, yet.

So, after all that has been said and done, the 4.1% is bad, but it is not as bad as it looks.

I mean what is not to like?

Consumption grew well and government expenditure was stable. I like this 4.1% growth better than the “fake” 6.5% growth in 4Q2012.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — federal government expenditure actually grew by 9.3% y-o-y in 1Q2013 and revenue was down 8.6% y-o-y. Fiscal deficit ratio for the quarter was 6.4%. It is an improvement from 8.7% deficit in 4Q but I am unsure about the government lowering its deficit now.

Categories
Economics WDYT

[2687] Guess the 1Q2013 GDP growth!

So, trade surplus in the first quarter of 2013 very much contracted. Net exports in current prices were down by 44%. Although imports fared considerably better than exports in the quarter (hence the big drop in trade surplus), imports of consumption goods were weak, which may suggest that consumption itself slowed. Another bad news is that industrial production also did not grow. I do not think it was mostly due to the fact that 2012 was a leap year since March y-o-y figures were weak.

I am unsure about the investment figures but those investment figures are already high, thus making faster growth unrealistic.

On the plus side, government expenditure was likely up due to electioneering. But that part of the economy is the smallest among all of the components.

Whatever it is, that quarter growth will be significantly slower than the surprising 6.4% y-o-y achieved in 4Q2012. Consensus has it at 5.4% y-o-y according to Bloomberg. I have a feeling it will be lower.

How fast do you think did the Malaysian economy grow in 1Q2013?

  • Above 6.0% (6%, 1 Votes)
  • 5.5% - 6.0% (6%, 1 Votes)
  • 5.0% - 5.4% (17%, 3 Votes)
  • 4.5% - 4.9% (33%, 6 Votes)
  • Below 4.5% (39%, 7 Votes)

Total Voters: 18

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The official GDP estimates will be released by the Department of Statistics on Wednesday’s evening.

Categories
Economics

[2685] Austrian alert!

Managing imbalances and rising indebtedness under a low interest rate environment

Very low interest rates have now prevailed for a number of years and appear to be likely to continue for the foreseeable future. Given the duration of the easing period, a key question is whether monetary policy can still be considered as being counter-cyclical or has there been a stuctural change in the monetary environment. It also gives rise to the potential unintended consequences of the prolonged low interest rate environment in terms of the mis-pricing of risks, overleveraging and rising household indebtedness, disintermediation of savings away from the banking system, excessive speculation, and the formation of asset price bubbles. Such developments could create financial and macroeconomic vulnerabilities that could harm the long term growth potential of the economy.

Papers on this topic could touch on potential policy issues arising from the prolonged period of low interest rates, and explore possible measures to address financial imbalances. Studies on the effectiveness of alternative monetary tools and instruments in managing risks of imbalances are also welcomed. [Bank Negara Malaysia’s Conference on “Monetary Policy in the New Normal”. Bank Negara Malaysia. Accessed May 8 2013]