Tag: GDP

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Economics

[2172] Of did we need the stimulus package?

The fourth quarter of 2009 saw Malaysian economy recorded strong recovery on year-on-year basis.[1] So strong it was that the monetary authority of Malaysia went for a rate hike, making Malaysia the second country after Australia to adopt a hawkish monetary policy.[2] The question that should be asked now is, did we need the big stimulus?

The question is particularly relevant because the main driver of recovery has been external demand. This is something I have been stressing from the very beginning and it is the thrust of my opposition to economic stimulus, especially in the fashion of fiscal expansion, given the effect of the expansion on fiscal deficit, effect on future taxpayers as well as its potential adverse effect on private borrowers and therefore the economy sans the public sector.

Growth for external demand for domestic goods almost doubled the growth of domestic demand for goods.[3][4] Add the fact that external demand makes up a very large part of Malaysian GDP, in fact approximately 100% in terms of exports-to-GDP ratio,[5] the stimulus seems unnecessary.

Without the stimulus, recovery might have been less impressive than what was registered recently; it would be a recovery nonetheless. This however assumes that the government spending has no affect on interest rate and thus, the exchange rate. This is possible if the monetary authority, which is the Bank Negara, colludes with the executive branch of the government.

But expansion of fiscal policy does affect interest rate and the exchange rate assuming independence of the monetary authority, at least within the typical IS-LM model under open economy.

With that model with that particular settings, recovery without stimulus could have been just as impressive. If the extraordinary fiscal expansion were absent — the factor inhibiting exports that is higher exchange rate due to fiscal expansion would be absent — external demand for domestic goods could have increased much more than the already impressive level we saw at the end of 2009.

Remember, a lot of people were pleasantly surprised by the fourth quarter growth.

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[1] — Malaysia’s economy expanded 4.5 percent in the final three months of 2009 from a year earlier, Prime Minister Najib Razak said yesterday. Economists expected a 3.2 percent expansion, a Bloomberg survey showed. Gross domestic product fell in the preceding three quarters as exports slumped amid the global financial crisis. [Malaysia May Beat Korea, India to Asia Rate Increase. David Yong. Bloomberg. February 25 2010]

[2] — March 3 (Bloomberg) — Malaysia may be the next Asian country to pull back monetary stimulus as its recovery strengthens, moving to raise borrowing costs or reduce excess cash in the economy ahead of neighboring Indonesia. [Malaysia May Pull Monetary Stimulus Before Indonesia . Shamim. David Yong. Bloomberg. March 3 2010]

[3] — The external sector performed favourably with both Exports and Imports turned over by 7.3 per cent and 6.9 per cent respectively. The improved demand for the products of Electrical & Electronics, Animal & Vegetables Oils & Fats and Chemicals have contributed to the increase in Exports. Meanwhile, the growth in Imports was due to the higher demand for intermediate goods and capital goods. [National Product and Expenditure Accounts Fourth Quarter 2009. Department of Statistics of Malaysia. February 24 2010]

[4] — Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%. [A tale of two recoveries: Malaysia vs. Germany. Rebecca Wilder. News N Economics. February 25 2010]

[5] — See trade profile of Malaysia at World Trade Organization. Accessed March 5 2010.

Categories
Economics

[2068] Of o stimulus, where art thou?

Apparently, the second quarter GDP results came out way better than expected.

Aug. 27 (Bloomberg) — Malaysia’s economy is expected to resume growth this year after slipping into its first recession in a decade last quarter, mirroring recoveries across Asia.

Gross domestic product shrank a less-than-expected 3.9 percent in the three months ended June from a year earlier, after a 6.2 percent contraction in the first quarter, the central bank said yesterday. Economists, who were expecting a 5 percent decline, are raising their GDP forecasts for Southeast Asia’s third-largest economy.

Asian economies are reporting better second-quarter GDP numbers as the global slowdown eases after fiscal and monetary stimulus around the world. Malaysian central bank Governor Zeti Akhtar Aziz said yesterday that the government will revise its GDP forecast for a 5 percent contraction this year in the budget to reflect the nation’s economic improvement. [Malaysia’s Economy May Resume Growth This Year on Higher Demand. Shamin Adam. Bloomberg. August 27 2009]

Now, first of all, this dismisses concerns from some quarters that there was a need for a third stimulus package. These alarmists should be shot. No, I am not kidding. I really mean shot. I almost had a heart attack when I read about the suggestion months ago.

Secondly, we will only notice the stimulus money in full action only after recovery has taken place. I have taken this position from early one and I am being proven right. In fact, signs for recovery began as early as February, way before any stimulus has any impact. Since February, various indicators have shown general improvement independent of stimulus.[0A] The good news is that exports also improved;[0B] I have also maintained that recovery will be export-driven.

The official line is that the stimulus package helped cushion the fall. It may help by a tiny bit but changes in exports is more significant than increase in public spending, which more or less. a proxy of the stimulus package. Imports too went up but it is unclear if it was due to domestic consumption or instead, correspond to the increase in exports. Given that the make-up of the economy is that many of imported goods are intermediary goods which are used for exports, I am more inclined to favor the exports answer.

On top of that, in contrary to the celebrated increase in private consumption as announced by the Governor, in real terms, it fell to further gives credence to the exports explanation.

The same could be said about the increase in for capital formation. It is probably due to increased exports more than it could be about stimulus spending.

Furthermore, it appears that Malaysia may not have any need for a stimulus in the first place, or at the very least, the kind of outrageous size that we saw earlier. Proponents of stimulus, especially ones who advocated greater government spending as the base of that stimulus, were merely panicking more than anything else when they decided to unveil a large stimulus package, as I have accused them of.

As an aside, the much hyped Rangsangan Ekonomi website[1] which was announced as a site to make the stimulus spending transparent is especially a great cheat. For the second stimulus, it does not give actual progress. Rather, it only gives distribution of money. The whole thing is a big fat lie.

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[0A] — See The Coincident, Leading and Lagging Indicators, and Growth Rates, 2005-2009 table by the Department of Statistics.

[0B] — See Gross National Income (GNI) by Expenditure Components in Constant Prices (2000=100) and Current Prices table by the Bank Negara Malaysia.

[1] — To see it, go to http://www.rangsanganekonomi.treasury.gov.my/. Information for the first stimulus package however is respectably shared, unlike the second and much larger one. Accessed on August 27 2009.

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p/s — I am delighted to discover that the BNM website has been upgraded. Kudos to BNM.

Categories
Economics

[1996] Of what increased trade surplus due to fallen imports typically means

There are a lot of things to be optimistic about. The recent increased in Malaysian net exports however is not one of them.

The increase is due to fallen imports. That is generally bad and especially so within Malaysian context. So, I will find my blood pressure spikes slightly whenever I read in the news and other writing of a slew of bad things only to read a negating adverb like, ‘however’, ‘nevertheless’, ‘nonetheless’, etc. to introduce the fact that net exports increased due to fallen imports. And it really pains me to see words like ‘fortunately’. There is nothing fortunate about it for heaven’s sake, unless you are a some kind of neo-mercantilists.

Why is it bad?

In the accounting of gross national product, the component imports is subtracted from exports because it is redundant to another component that is consumption. Imported goods, with the exception of intermediary goods which are meant to be reexported, are consumed locally.

For the reexported goods, it would be reflected in the exports component. For the imported and locally consumed goods, it will be reflected in the consumption component.

For the sake of clarity, the simple form of GDP is Gross Domestic Product = (Consumption + Investment + Government Spending + Net Exports), where Net Exports = (Exports – Imports).

Increased net exports due to lower imports, means consumption is suffering. That cannot be good for the economy, with all else being equal.

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Economics

[1994] Of fiscal stimuli did not factor in Q1

Whatever the results may be for the gross domestic product growth rate for the first quarter of the year, let us be clear about one thing. The two fiscal stimulus packages have only insignificant impact, if not at all, to Malaysian economy in that period.

Any effort to paint the stimulus packages as having helped to cushion the impact economic slowdown we saw in the first quarter should be received with extreme skepticism.

One has to remember that, while the first fiscal stimulus package was announced by the Abdullah administration in November 2008, there was no real spending done even as February 2009 passed us by with the speed of a tortoise. The government at that time was still scrambling to distribute money to various ministries and not actually spending it.

This has been admitted by the Second Finance Minister himself. In early March, he was reported as saying that barely half a billion ringgit from a total of RM7 billion had been spent.

Two months later — by May 12 2009 — according to a website established by the Treasury to inform the public of the status of the two stimulus packages, only a further quarter billion ringgit was spent from the RM7 billion.

Given the horrifying demand gap caused by weakened external demand, actual spending derived from the first fiscal stimulus is very much irrelevant to the GDP growth figure for the first quarter of the year.

If one insists that the RM750 million did cushion the fall that certain Ministers claimed it would earlier in the year, perhaps I am obliged to share the following analogy: it is only akin to preparing a mattress on the ground with the intention of saving a person who has just jumped off from level 88.

One also has to remember that the second, much larger, stimulus package was only announced on March 10 2009, which was already close to the end of the first quarter. Furthermore, it is impossible to believe that the second stimulus package came into effect immediately, especially accounting for the kind of lag suffered by the first stimulus package.

How much of the second stimulus worth RM15 billion of government spending has been spent is unclear. The same website commissioned by the Treasury is coy about divulging the same information it shares when it comes to the RM7 billion stimulus package. Nevertheless, experience tells us to be rational and not to expect too much.

Consider this: if the government faces trouble in spending RM7 billion even after approximately 7 months have passed, how exactly does one expect the government to spend another RM15 billion within just over 2 months?

That skepticism should be strengthened further with the knowledge that the government only began to borrow massively in April. We know that the second fiscal stimulus needs to be financed through borrowings. And we know that April is not part of the first quarter.

The best hope of making the second stimulus relevant is the RM3 billion tax cuts as well as the loan guarantees attached to the second fiscal stimulus, or the mini-budget in the language of the government. Alas, information about that is not so forthcoming for us to move beyond mere speculation.

Hence, the effect of tax cuts and guarantees notwithstanding, the effect of the two government spending-based stimulus packages has to be largely discounted if we are interested in explaining the results of the first quarter for the year 2009.

What might make the two stimulus packages all the more irrelevant is the manner which the economy behaved in the first quarter. While the jury is no doubt still out there, early indications do not bode well for proponents of government spending as the heart of fiscal stimulus.

The reason is that the economy — as indicated by various indicators — is arguably performing better with each passing month since January, on the margin. It is better in a sense it has been less bad than before; to be precise, the change of sign of the second derivative.

This happens in spite of the lack of significant interference in the economic cycle as planned by the two fiscal stimuli. The significance of this is that it may prove to those who lack confidence in the market that the economy does not desperately need government spending. This also provides a damning evident that we do not need a third stimulus package at all.

So far, the best factor to explain possible turning of the economy may be the very factor that brought the economy to a tailspin in the first place: external demand.

It is hard to resist connecting the improved local condition with the health of the blessed Chinese economy. Even in the US — another major destination for Malaysian goods — talks of green shoots are aplenty.

If the trend continues, we may see a bottoming out soon enough even without additional government spending as allocated by the two fiscal stimuli. Indeed, the chances that the economy gets better before the full effect of the stimulus packages kick in are becoming brighter now than anytime before.

As it may turn out, the billions of ringgit of government spending may only increase our public debts. That will increase the cost of borrowing in the future and possibly later, the imposition of higher taxes for all, on average.

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First published in The Malaysian Insider on May 26 2009.

Categories
Economics

[1546] Of 40% better sir?

Punching bag of the day:

PENANG: Malaysians from all walks of life are better off now than four years ago.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said the country’s per capita income had risen by 40% between 2004 and 2007, from RM15,819 (US$4,163) to RM22,345 (US$6,452).

“If we compare in terms of US dollar, the per capita income has risen by 55% during the period due to the depreciation of the dollar against the ringgit. [Malaysians better off than four years ago. The Star. February 10 2008]

I am not so sure how the Finance Minister gets the 40% increase. I approximate that there was a 13% real increase in GDP per capita instead.

I did my own calculation and using approximated figures, I estimated that Malaysian GDP in real terms has increased approximately 20% since 2004. Remember, these are based on approximated figures and this reminder is especially important when the official GDP for Q4 2007 has yet to be release. It is expected to be release no later than February 29 2008 but the Finance Minister probably has access to such information regardless. The population sizes are approximated figures as well. Still, a 40% increase sounds awfully high.

One could get to a higher figure if the MYR is converted into USD (without considering purchasing power parity). In USD terms, there was an increase to approximately 31% in GDP per capita. If one reconverts the USD figures into MYR using 2007 nominal exchange rate instead of using the rate corresponding to the respective years, one will get 31%. This may correspond to the Minister’s 55% figure.

It is worth noting that the 31% and 55% figures are meaningless as a measure of well-being because most Malaysians do not earn in USD and spend in MYR. Instead, they earn in MYR. This makes the 13% and the 40% figures more relevant than the same figures read in USD.

I constructed the table below to summarize what I am trying to highlight.

Some rights reserved. By Mohd Hafiz Noor Shams.

For the full version of the workings, you may download it here.

Tony Pua is right about we would need to grow about 12% per year to get the 40% figure.

To achieve 40% growth, Malaysia must be growing in excess of 12% per annum. Hence, to grow by 40% over 3 years, with a population growing at just under 2% per annum, that will actually make Malaysia the fastest growing economy in Asia, outstripping even China and India. [Malaysian Income Rose by 40% over 3 years? Philosophy Politics Economics. February 10 2008]

I have included his 12% scenario into the calculation in the file if you are interested in it.

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p/s — Could it be possible that the Minister included inflation in his calculation? If so, we need a GDP deflator. Or nominal GDP as data instead of real GDP. Or inflation rate.