Tag: consumption

Categories
Economics

[2765] If pre-GST spending was that high, how low would it be post-GST?

The Malaysian GDP figures released yesterday suggest there was indeed a pre-GST spending spree.

Private consumption growth was phenomenal especially if you consider the fact that previous quarterly growth figures have been slowly dropping gradually over the past year from 8% year-on-year to all the way down to mid-6% in the third quarter of 2014. The latest consumption figure grew 7.8% year-on-year, which is crazy. It is so red hot that if the overall situation had not been so gloomy, Bank Negara would surely have panicked and raised its rates by another 25 basis points. This is quite a surprise even if you had believed the pre-GST spending spree hypothesis.

As a result, 2014 growth was at 6%, which is higher than most (well, all) economists watching Malaysia had projected.

But the central bank would not hike rate because the feeling is that the jump is temporary. I think it would last into this quarter before growth takes on a drowsy mode. The GST should depress consumption growth from April onwards. This is the danger. If consumption could jump so high pre-GST, how low would it get post-GST?

That is a scary thought.

This also gives more proof that consumers do expect prices to increase post-GST. I should add ceteris paribus, I guess, because the low retail fuel prices could make the net effect somewhat a wash. As for the recent electricity tariff cut, do not bother. I did a simulation and it hardly changed my headline projection.

Regardless of expectations, I am unsure there would be an actual net price hike. Last year, somebody told me the authorities expected (ranging from the Department of Statistics to the Treasury) inflation would hit 6% with GST, after months of official drive by the mainstream press that inflation would rise. Then it fell to about 4%. (You could understand why most banks are projecting about 4% inflation previously. They took the government’s guidance to heart) Now? I was informed the government expected it to be about 2%, mostly because of fuel prices. My own projection is about 3.3% YoY monthly average where I assume the GST will hit the economy in full force without any exception-zero rated stuff, but I keep several projections in the spirit of scenario analysis with the lowest at about 1.5% YoY where I pretend GST is the spoon in The Matrix.

My confidence in my models is  at an all time low and I have resigned to the fact that we will only know it in June or July when the Department of Statistics will release the April-May inflation figures. The crazy demand fluctuation, the retail fuel flotation and the GST make projections go everywhere.

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

[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.