Tag: GDP

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Economics

[2789] What happened to second quarter consumption imports?

There is something quite weird going on in the imports data.

In the last quarter, we all know we had GST for the first time. It replaced an older consumption tax. After all have been said and done, the effective rate was higher than it was under the old regime. That means higher tax. You could also see it in the inflation figure that hit 2.4% YoY in May from almost 0.9%% in March when retail petrol prices took a dive.

There were concrete proofs of frontloaded purchases happening from the 2015 first quarter GDP statistics. From the 2014 fourth quarter even. Consumers did buy everything to avoid paying the new consumption tax. It happened on a scale grander than the ridiculous lines formed at the petrol station each time a price hike was announced. The GDP consumption component rose 8.8% from a year ago in 2Q15 at a time when credit growth was very weak. Bank loans used to increase more than 10% YoY each month. Now, it is about 9% YoY. All those lending requirement tightening are working.

201508GDPCvsLoanGrowthMalaysia

There is not much correlation from the chart above but the theory is, weak credit growth should affect spending growth negatively. Less money for everybody. The GDP consumption spike is jarring in that aspect, lending credence to the frontloading theory.

If the theory is right, we should see considerable weakness in private consumption growth in the second quarter. And there are quite widespread anecdotes of weaker consumer activities all around. Some statistics like car sales are extremely weak, providing more concrete proof to rely on.

On the surface, merchandise imports data suggests the same thing. In terms of value, it fell 5.2% YoY in the second quarter. In term of volume stripping off the price effect of depressed commodity prices like crude oil, gas, palm oil and rubber, it fell about 4.8% YoY in the same quarter.

So far, so good for the frontloaded purchase theory.

But there is a wrinkle.

Malaysia is a huge trading nation and it is an integral part of the global supply chain. We import not just end goods but also intermediate goods used for the production of other goods. Some are reexported.

Deep down beyond the import headlines, we can see some of these at work. The cause of import contraction however does not seem to be weak consumption growth. In fact, imports of consumption goods have been growing strongly despite the GST in the second quarter (and also despite the weakening ringgit).

201508consumptionImportsJune2015Malaysia

I cannot drill down the category too deeply. So, I do not know the exact reason behind the increase in consumption goods. I have heard explanation that goes like this: the imported stuff were really luxury goods and demand for it had not really let up, suggesting a tale of two classes in Malaysia. But I do not know for sure.

The second quarter GDP numbers will be out next week. Perhaps that would provide some answer to the puzzle.

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Economics

[2777] Rebasing, revision and GDP-ratio targets

From time to time, economic statistics get revised. Usually statisticians require a lot of time to compile data and in that mad rush, certain data could left out first and included only later when everybody gets a chance to reflect. There is nothing structural about the revision. It is just about errors, corrections and business as usual.

Other times, the revisions are more structural. Some are structural only because of definition change like what happened with the concept “external debt” last year. Others include very deep changes. An example of that is the GDP rebasing exercise and it affects policy targets.

The Malaysian GDP gets rebased once every five years and the exercise consists of two parts: rebasing and revision.

The rebasing itself is simply a manipulation of index but the more significant part of the exercise is the revision that include/exclude of new/old sectors. Strictly speaking, the change in the composition of the GDP is not rebasing but instead, it is a structural revision. It is really the revision that makes rebasing such a big deal.

The revision is a problem for any policy with GDP-ratio targets as it can make such targets quickly irrelevant. Since Malaysia structurally revises its GDP once every five years (for instance, from 2010 to 2014, the GDP base year was 2005. For 2015 till 2019, the base is 2010), any GDP-related target formulated in 2013 for instance could become problematic in 2015 when a new GDP series is used.

Here are two examples.

First is the 55%-to-GDP debt limit that the Malaysian government maintains. Notwithstanding the off-the-budget spending criticism as well as the fact that the limit itself is a paper tiger and assigned arbitrarily, the government promises to keep its debt below 55% of GDP. Previously, a lot of people were worried that the government would breach the limit. Not so much now and this is largely because of the revision.

As you can see, the old GDP series (with the 2005 base) has the government cutting it close but under the 2010 GDP series, there is a lot of space still for fiddling around:

Effect of GDP revision on Malaysian debt limit

The implication? It gives the government more room to borrow just because the GDP statistics have been revised upward while allowing the government to keep to its words.

Another example is the fiscal balance of the federal government. You can see, the Malaysian fiscal deficit ratio is slightly lower under 2010 GDP series compared to the 2005 series.

Effect of GDP revision on fiscal balance

The ratio changes are not trivial from policy perspective.

In the case of deficit, previously thought to be a severe policy under one GDP series might not be so severe under the other after all. For instance, the federal government recently revised its deficit target from 3.0% to 3.2%. But 3.2% deficit under the 2005 GDP series is harder to achieve than it is under the 2010 GDP series. If the government sticks with the 3.2% target after the rebasing/revision, then the government could have higher absolute deficit and actually borrow more than it would have if there was no rebasing/revision exercise.

To put it simply, the goal post moves and it becomes larger.

This is part of the reason why I prefer to target deficit on government revenue instead of  on GDP.

I suppose the other way to correct for this is to tighten those targets every time there is a rebasing exercise.

And there are other policies beside fiscal that look at GDP-ratio too.

I think the revision would become less of an issue if it is done every year. The problem with doing it once every five years is the sudden jump, which can throw a lot of targets into questions. Policymakers make targets simply on incomplete and dated data. In fact, any target made based on the status quo would be softer than it looks like.

A yearly revision would solve that and make any GDP-ratio target more robust.

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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.

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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

[2725] Malaysia’s 4Q13 GDP figures

I was optimistic that the 4Q13 GDP figures would be strong. I was betting on export recovery while mindful that other components, mostly consumption growth, might slow down.

Indeed export growth recovered. But trade surplus was not as strong I thought it would. Still, the prospect of Malaysia experiencing a trade deficit is unlikely. The trade surplus was strong enough for me to say, hey, there would be no twin deficits for Malaysia, no siree.

So, I missed by full-year growth by about 18 basis points. I projected 4.9% growth (well, more like 4.86%) for 2013 but actual growth came at 4.7% (4.68% really).

While the 5.1% YoY for the quarter was still good, especially given the first two quarters had about 3% YoY only, this is one of those quarters which I find growth confusing.

I looked at the numbers and I saw consumption growth slowed, gross fixed capital formation growth slowed, government spending growth slowed and trade balance growth slowed too. I think the exports growth is the only real good news around, but clearly it was not strong enough to make overall growth accelerate.

Now, with every one of those major components had their quarterly YoY growth slowed, what could possible make the overall GDP numbers grew faster?

Inventories had a role in it.

You could see the contribution of all the GDP components to the 5.1% growth below. For the investment contribution, it is the fixed capital formation, which includes inventories:

20140213 4Q13 GDP contribution to growth

I am not so sure how I feel about that.