Category: Economics

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Economics WDYT

[2662] Guess the GDP growth rate!

How fast, do you think, did the Malaysian economy grow in the fourth quarter of 2012 in real terms from a year ago?

  • 6% and above (0%, 0 Votes)
  • 5.5%-5.9% (16%, 3 Votes)
  • 5.0%-5.4% (47%, 9 Votes)
  • 4.5%-4.9% (11%, 2 Votes)
  • 4.0%-4.4% (5%, 1 Votes)
  • Less than 4.0% (21%, 4 Votes)

Total Voters: 19

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Here is some background. Malaysian exports did badly in the fourth quarter. Europe and the US suffered from contraction at the same time.

Nevertheless, domestic demand appeared strong. Private consumption growth was likely pretty solid.

In the first, second and third quarter, the real GDP grew by 5.1%, 5.6% and 5.2% from a year ago respectively.

Out of 21 private economists surveyed by Bloomberg, the median estimate is 5.5% growth. The highest projection is 6.4%. The lowest is 4.3%. My own model estimates it to be 5.2% (this is based on old data and I have not touched it for almost two months).

But they are economists. What do they know, eh?

So, what is your favorite number?

The official GDP numbers will be released tomorrow by the Department of Statistics.

Categories
Economics

[2661] For the gazillionth time, 2009 was a recession year

Idris Jala in his column in The Star today wrote something that I have always found disagreeable (or maybe since 2010 when I first encountered this kind of argument):

In just two years, we increased our GNI per capita by 45% from US$6,700 in December 2009 to US$9,700 in December 2011, a rare feat in today’s world. [Idris Jala. Davos Takeaways. The Star. February 2013]

My issue has always been the 2009 baseline because the year was a recession year. Because of that, a large portion of growth since 2009 originated from recovery, which has little to do with Pemandu and more importantly, it has little to do with structural growth. In simpler words, it was cyclical growth. The base was extremely low by recent standards. Any post-recovery year level will register high growth rate compared to the base. I have written something similar about this nearly three years ago.

To control for that low base, it is imperative to measure it from previous local maximum. In this case, 2008.

Here is a bar chart of yearly growth of nominal GDP per capita for Malaysia as obtained from the World Bank (the difference between GDP and GNI for Malaysia is relatively small. Whatever pattern you see in GDP, you will very likely see the same pattern in GNI as far as Malaysia is concerned, as long as the dimension is consistent, i.e. compare real numbers with real numbers, or nominal with nominal):

Nominal GDP per capita Malaysia

Now, if you measure 2011 GDP per capita in nominal terms since the recession year of 2009 as Idris Jala had done with his nominal GNI figures, 2009-2011 growth would be 37.9% (contrast this with Idris Jala’s 45% claims. Let us assume good faith that the difference is due to honest calculation; population size and actual GNI calculation could be different. The difference between GDP and GNI could contribute to it as well. Data source could be a culprit as well as the Department of Statistics last year updated and improved its time series to include more data, never mind the exchange rate given that it is nominal GDP expressed in USD). It means yearly average of nominal GDP per capita growth is 8.4%.

If you measure that GDP per capita growth based on what I said, 2008-2011 growth would be lower at 18.8%. The yearly average from 2008 to 2011 is 4.4%.

The difference says a lot. It says out of that 37.9% growth, about half of that growth was due to recovery. And that recovery had a lot to do with external demand…

Really, if you look at the chart, meaningful growth, i.e. growth gained after we had caught up with the old level, only came largely in 2011. There was no growth in 2009. We only got back to where we started in 2010. In 2011, we finally grew (the same narrative is true for real numbers as well).

The problem with Idris Jala and company is that they like to use the 2009 baseline as a proof that they are doing good. Based on their narrative, whatever they are doing is reflected in the growth numbers. After all, Najib came to power after forcing Abdullah to come down in 2009. In the same year, Pemandu was established by the new Prime Minister. You see, the correlation is perfect!

But any respectable person will know correlation is not causation. And in this case, Pemandu and Najib are only a coincidental third variable that exhibits correlation because they were lucky to be whatever they were at the most serendipitous time.

For the recent 2012 growth (2012 versus 2011), then maybe something can be credited to Pemandu. For previous recent growth, it just takes too much dishonesty and audacity to say a majority of growth from 2009 to 2011 could be credited to Pemandu. And given the low base effect, measuring growth from 2009 gives an overly sunny growth number that ignores the context of recession.

And of course, in the game of claiming undue credits, the larger the number, the better it is. Be damn with context.

Categories
Economics

[2660] A currency war that is not so bad

A currency war is inevitable in the era of quantitative easing (QE). While the long-standing assertion by major central banks that the exchange rate is not a policy tool is pretty much true, there is a well-understood link between monetary policy and the strength of a currency. It is no mystery that the market expects a currency to depreciate each time the monetary authority in control of the particular currency decides to expand its policy.

So, just because the exchange rate is not a policy tool does not mean these central banks are not involved in a currency war. The truth is that it only makes their participation in such so-called war indirect. These central banks have been accused of weakening their currencies through the back door even as they maintain a free-floating exchange rate mechanism.

The need for QE is not being disputed here. The world is stuck in an extraordinary situation where any typical monetary policy is simply inadequate. Rates are so low that it cannot be lowered anymore. QE easily circumvents that problem.

The need for weaker currency for certain countries is also not being disputed here. Time is so bad in the developed world that, almost everybody there wants to export their way out to prosperity.

Currency depreciation does increase the competitiveness of a country by making its exports cheaper to the rest of the world. The issue is that nobody can have a weak currency all at the same time. A currency is always valued against the rest. Someone out there will always suffer from a stronger currency. It is a race to the bottom so to speak.

Under normal situation, the tit-for-tat policy can be disastrous. Economists have a special name for that: beggar-thy-neighbor  Add in concerns for hot money inflow and asset inflation, emerging economies are ill at ease with ever looser monetary policy in advanced economies.

But then again, are the QE and the implicit currency war that follows really that bad in this time of extraordinary circumstances?

The world’s economy requires some kind of rebalancing. Notwithstanding the debate on fiscal austerity in Europe, there is a need for the developed world to spend less and save more, and they may need to export more and import less.

This is the very opposite of what is mostly required by many emerging countries, which do save too much and continue to be export-dependent. The dependency maybe untenable in the near future since most exports go to the very economies that are struggling to grow in the first place. There is just not much room for exports to grow anyway.

For Malaysia, there has been some kind of rebalancing. While the national economy continues to rely heavily on exports, domestic demand has played an increasingly bigger role in moving the economy forward.

Despite uncertainty in the global economy, Malaysia has grown at a rate that is largely surprising in the past few quarters. The fourth quarter national GDP numbers will be released soon and the figures will likely show an uninspiring export growth in contrast to a relatively strong domestic demand growth.

Strong domestic demand translates into strong import figures. In fact, the contrast between global demand of Malaysian goods and services and domestic demand has been spectacular. Malaysian exports for 2012 did not grow more than 1% from the year before while imports grew by nearly 6% in the same period. It is really a wonder that Malaysia maintains a trade surplus still.

Before anything, it is good to know that at least 20% of imported goods and services in 2012 originated directly from countries which unambiguously run a QE programme. Three of those countries are the United States, Japan and the United Kingdom.

These two facts, the first being strong import growth and the second being a large chunk of it is coming from the big three advanced economies engaging in QE, highlight at least one benefit of the currency war: the continuing depreciation of those currencies has kept Malaysian imports cheaper than it would have been otherwise.

This is especially relevant since Malaysia is embarking on massive investments which include the construction of mass rapid transit lines. These efforts require considerable imports of goods the domestic industries are incapable of supplying.

Furthermore, the federal government does have a role in financing these projects in one way or another. It is very possible that the growth of government expenditure has been limited by a stronger ringgit, which has allowed for cheaper imports. That also means it limits the size of fiscal deficit of the federal government, which has come under intense public scrutiny in recent times.

So from this perspective, the supposedly currency war between the big economies is not that bad. While some measures against hot money and asset inflation may be called for, this is a show Malaysia should sit back and enjoy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Sun on February 14 2013.

Categories
Economics

[2658] Quick reaction to Malaysia’s December economic figures

Export and import numbers for December 2012 do not look good. Export contracted by 5.8% while imports decreased by 6.5% from a year ago. Despite the bad numbers, industrial production index grew by 3.7% from a year ago.

I find this curious. Import contracted and that means the domestic economy might have slowed down. Exports contracted too and that means external demand did not do too well either. So, industrial index should take a hit but it grew anyway, albeit slower than the 7.1% growth in November versus a year ago. It is possible that there is a lag between the index and trade figures but strong index number last month did not reflect in this month’s trade figures.

Maybe the inventory went up. The fourth quarter GDP figures will be released later this month. We will see what happened to the inventory soon.

Categories
Economics

[2657] Fiscal devaluation mimics currency devaluation

I am a supporter of regionalism. Despite whatever jokes I may have about the euro, I do not want to see its disintegration.

While I have refined my opinion by stressing on the importance of having similar economies coming into a union instead of having a disparate set of economies with wildly different setups and cycles coming together, I do still pretty much in favor of monetary union. I may be in the minority now but I do advocate a single currency for Southeast Asia. Not for all countries in the region but maybe just between Malaysia, Singapore and Brunei. These countries were in a union before while Singapore and Brunei are effectively already in a currency union. Furthermore, Malaysian and Singaporean economies are similar in many ways – both are trade-dependent though more so for Singapore. A combination of Indochinese countries can form another separate union. So, I envision at least two monetary unions within Asean (or three with Indonesia and Timor Leste together).

I am still amazed by the fact my trade professor at Michigan showed me. During one winter morning, he showed that trade between New York and Seattle was many times higher than between Seattle and Vancouver, despite the fact that Seattle is much closer to Vancouver than New York. “It appears Canada is located on the moon!” he stressed.

He was demonstrating that monetary union increased trade. As a strong believer of the net benefit of free trade, I was hooked by it. Even now.

And Europe has benefited from its monetary union, even as it is hobbled by troubles right now.

One painful but the obvious solution to the ongoing European problem is for countries in economic recession, indeed, depression, to leave the Eurozone and devalue their currencies. That would have happened in a typical country during a recession. Currency devaluation helps a country regains its competitiveness by making its exports cheaper to the rest of the world. That what happened in Malaysia in the periods after the worst recession the country has ever experienced yet. That was what happened in Asia. It was an export-driven recovery.

For the 17 members of the Eurozone, devaluation is not an option if the integrity of the euro is cherished.

There are alternatives to exit from the Eurozone.

The first was internal devaluation. This pretty much refers to austerity measures. Wages are cut down to make a crisis country more competitive, among others. This a painful because while it does aid competitiveness, it does create a downward spiral that is associated with deflation. People will not spend before they expect prices tomorrow will be cheaper than today. People will not spend because they have less money. While real prices will adjust in the long run, the short term can be really painful.

There is an interesting article on Bloomberg today about fiscal devaluation as proposed by economist Gita Gopinath (of Harvard “Call Me Maybe” recruitment video fame, anybody?).[1] It tries to mimic the effect of currency devaluation, which makes it very appealing. It includes a hike in value-added tax along with the provision of tax credit. The arrangement discourages imports and support exports. The VAT is imposed on all domestically consumed or used goods but the tax credits are granted to all domestic producers that eliminate the effect of VAT. Exporters benefit from this setup. Importers suffer. The great part is that it is no clear link to price deflation, which makes this arrangement usable in time of recession.

That however does raise the alarm of protectionism. In times like this in Europe, it is tolerable. In normal times, this can be a barrier to free trade. It can give unfair advantages to the home countries that may later mimic the ugliness of currency wars.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — When French President Francois Hollande unveiled a plan in November for a business tax credit and higher sales taxes as a way to revive the economy, he was implementing an idea championed by economist Gita Gopinath.

Gopinath, 41, a professor at Harvard University in Cambridge, Massachusetts, has pushed for tax intervention as a way forward for euro-area countries that cannot devalue their exchange rates. ”Fiscal devaluation” is helping France turn the corner during a period of extreme budget constraints, former Airbus SAS chief Louis Gallois said in a business- competitiveness report Hollande commissioned. [Rina Chandran. Harvard’s Gopinath Helps France Beat Euro Straitjacket. Bloomberg. February 7 2013]