Tag: inflation

Categories
Economics

[2963] Is inflation the reason behind BNM hikes, at a time when the output gap is big?

Bank Negara raised its benchmark rate yesterday, from 2.50% to 2.75%. While the general reasoning is fighting inflation, I am not that convinced of it. My primary reason is, Bank Negara’s own analysis shows inflation (demand-push) is not a problem. Yes, consumer price index has been rising high, but most of those price increases are not something monetary policy can address without exerting damage to the economy.

The central bank regularly published estimates of output gap in the economy. Looking at the output gap is the easiest way to understand the economy quickly. To put it simply, the gap tells us about the capacity utilization of the whole economy. It is the difference between total (or maximum) capacity, and capacity used. When the used capacity is well below max, then inflation should be relatively low with unemployment high. When resources are not used up, there will be slack in the economy which is reflected in inflation and unemployment numbers. The same is true vice versa.

And based on the latest estimates published by Bank Negara back in March 2022, there is a huge slack this year (and estimated to be bigger than last year’s):

When the gap is big and when there are no other concerns, you would want to encourage the economy to keep going. You would want to close the gap, and approach full capacity (which is another way of saying full employment). And you can do this without much concern for inflation. That means, rates could be left low.

When you raise rates in these circumstances (as Bank Negara is doing), it means widening the output gap. You would lower demand-pull inflation (if there any), but since you have no control over supply-push inflation, you are just targeting the wrong part of the economy. You are pulling demand down almost immediately, but do nothing to the supply side, which is out of your immediate control (in fact, low rates improve supply, but not in the short term). Hence, widening the gap.

Beyond domestic considerations and on top of the current gap situation, there are concerns the global economy will go into yet another recession so short after the last. The US economy is close to experiencing one although its growth resilience so far has surprised many economists (and demand-pull inflation is problem there). Europe is almost certain to enter recession next year (war and gas supply are exacerbating supply-push inflation). Growth in China has been weak but there is some hope it would provide some cushion in an otherwise sullen world. When we look ahead, Bank Negara’s rate hike feels even more jarring and lags behind expectations, when they should be ahead of the curve.

So, when I read the Monetary Policy Statement and the references to inflation, I am not so sure inflation is the primary driver for the hikes. I have been suspecting so for a while now.

In my opinion, there are two other things at work that convinced the Committee to do what they did yesterday:

  1. It is about the ringgit. The currency along with many others out there have been under severe depreciation pressure due to US Federal Reserve’s series of drastic rate hikes. The end of easy money is upon us. And domestic benchmark rates are a big lever to relief the pressure partially: rising domestic rates would keep the difference with those in the US smaller than it would have been otherwise. And smaller difference means less depreciation pressure on the ringgit.
  2. The problem of zero-interest rate policy (ZIRP) and liquidity trap. Many conventional economists (of the 1990s?) believe monetary policy loses its potency the lower the rates go. And since Bank Negara Rates is already low by historical standards, maybe they are concerned about losing monetary influence and hoping to build up ammo for the next crisis.

In both cases, the cost of pursuing the goals will widen the gap today.

The relevant question is (especially with respect to the ringgit), how big would the gap be if the ringgit is allowed to depreciate beyond what the rate hikes allowed? Supply-pull inflation does hurt demand after all, and weaker ringgit means more imported inflation. Comparing the two gaps would help determine which policy to take.

I would love to read the minutes and see references to the gap, if any.

Categories
Economics Politics & government

[2951] Politics of prices is counter-productive

There has been a global supply constraint of various kinds for at least a year now. The supply chain disruption was expected by many—I quickly noted the post-war Malayan supply-side crisis as a parallel. Nevertheless, few people expected the constraints would be this tight for so long. I certainly did not.

The tightness has slipped over into the Malaysian consumer market. Chicken, beef, vegetables are the usual suspects.

The waitlists for cars are long due to a persistent global chip shortage: I test drove a Peugeot several weeks back and that experience to me underscores how modern ground vehicles these days are more and more an electronic device than a mechanical one. I knew vehicles had an ever increasing electronics (and electrical) components to them. Several months earlier, I read a report showing how the share of electronic cost relative to total car manufacturing cost has gone up drastically in the past 20 years, from less than 1% to maybe 40%-60%. But there is a difference between reading it, and riding the thing. The dashboard is a computer screen popping more information any older car could show. When I say dashboard, I mean a dashboard full of dynamic data, with customizable menu. The air-conditioning controls are only accessible through a separate central LCD screen, which also controls other aspects of the car. Even the brakes can be controlled by the computer, along with so many other things.

It is not just chip and electronic components are in short supply. Somebody on Twitter jokingly said “oh, this is the chip shortages they were talking about” in reference to shortages of fries at McDonald’s in Malaysia and Japan.

Consumer prices are rising, and it would have risen higher if it was not for price control mechanism and subsidies in place in Malaysia. This is readily observed from the following chart, where consumer prices are not rising as fast as producer prices. The latter is a proxy to global prices.

PPI vs CPI

Nevertheless, despite enjoying the shield, consumers have been complaining about rising living costs. They demand actions. More than a few activists and politicians have demanded the same.

All governments are sensitive to such criticisms and this government, especially as weak, incompetent and clueless as it is, is doubly so. The opposition has been relentless in their criticism. Some Pakatan Harapan supporters have highlighted how their government played a better and proactive role in addressing prices, and go on to claim a Pakatan Harapan government would have been far more effective in managing cost of living problem. And when Pakatan Harapan was in power, Barisan Nasional and Pas, on top of their usual racist rhetoric, also attacked the government for rising living costs regardless of whether prices was actually rising (prices then were actually very stable due to the imposition of an overly generous blanket fuel subsidy).

I dislike politics of prices. While it has its uses in cases when there are monopoly abuses and regulatory hurdles (the drop in broadband prices are a great exception), in the current climate prices are largely out of the government hands. The truth is, if Pakatan Harapan was in power, they too would not be able to do much about it either.

But that does not matter. Such is the politics of prices.

The problem is with the supply itself and the players of politics of prices simply ignore the cause of the problem. Some even go has far as misdiagnosing it as unhelpfully as greed.

A supply-driven crisis like this requires investment to loosen up the supply chain: expansion of ports, new technology to hasten production and delivery, new plants, more workers, etc. Yet, the aversion for price hikes have led to large government subsidies (think fuel), which takes fund away from productive investment purposes that are needed to address the supply chain disruption.

Politics of prices not only ignore the source of price pressures Malaysian consumers are experiencing. They ignore wages. Prices and wages are part of the same coin: wages are prices of labor. Notwithstanding issues relating to income distribution between employees and employers, and technology-driven price cuts among others, the politics of prices suppresses price growth, and through it, risk of suppressing wage growth.

More than once, the politics of prices have led to calls for wage cuts. The targets have been high-paying professionals and ministers (and their unqualified advisors), but too often, it has gone a little bit too far. Mahathir as the 7th Prime Minister for instance, is a fan of pay cuts and that unfortunately set the tone for the whole economy when he was in power. Coupled with his obsession with government debt (government debt and transparency were a problem), and his history with the gold dinar movement, it felt like he wanted a deflationary environment.

All that set the tone for austerity. There was really no austerity in place—government spending went up and the economy expanded—but the narrative set by the PM made it difficult to convince many out there that that was no austerity. And the economy, even as it expanded, took heed of the deflationary sentiment.

Categories
Economics WDYT

[2918] Guess the 2Q20 Malaysian GDP growth

We are back and tomorrow, the Department of Statistics Malaysia will be releasing the second quarter GDP figures. Without further ado…

How fast do you think did the Malaysian economy expand in 2Q20 from a year ago?

  • Grew by more than 0% (0%, 0 Votes)
  • Contracted by 0.1%-2.5% (9%, 2 Votes)
  • Contracted by 2.6%-5.0% (13%, 3 Votes)
  • Contracted by 5.1%-7.5% (17%, 4 Votes)
  • Contracted by 7.5%-10.0% (22%, 5 Votes)
  • Contracted by 10.1%-12.5% (17%, 4 Votes)
  • Contracted by more than 12.5% (22%, 5 Votes)

Total Voters: 23

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And… what. A. Ride. It. Has. Been. Politics. Economics.

The result is… there is no doubt the second quarter GDP figures will be terrible with a capital T. The question now will be by how much, and for how long.

The problem for the past perhaps 6-7 months has been the unreliability of statistics. Many statistical causal relationships depend on stable correlation. The supply-side shock has changed those relationships and there is a good risk those relationships are broken for good. In the aftermath of the 1990s Asian Financial Crisis for instance, economic growth rate has slowed in the decades after. This recession, the worst since forever, could do the same for various macroseries.

That, I think is how important the past months have been to Malaysian economics.

Now to the statistics.

Industrial production had taken a blow for the whole quarter. However in June, it was almost back up to pre-shock level. Almost, although I feel it is unclear whether a big chuck of the back-to-normal is due to old production lines coming back up, or some sectors overperforming. Or just factories trying to make up lost time (or just goddamn rubber gloves… joking). I write so because mining (with its perpetual supply disruption; investment is needed there to upgrades those facilities) and electricity production are not there yet. But for manufacturing, it shot up quite strongly. But overall, they are bad numbers, and increasingly less.

Similar observations for exports and imports. Both June exports and imports had jumped from May, but for imports, it has not returned to pre-crisis level yet. Not close at all. Imports are important numbers because it is a proxy to consumption and weak June imports suggest domestic consumption will remain weak going into the third quarter. Retained imports mirrored overall import figure: meaning a majority of imports recovery, if it could be called as such, was due to re-exporting activities.

As for inflation, I do not know what it shows with respect to demand. With fuel prices down so much, I think inflation is a bit of a whack as a signal. Core inflation also is not very helpful, which suggests it needs to be improved. For what it is worth, inflation is in negative territory, but I would not call it deflation.

Unemployment rate is another iffy indicator. It has surged, but in June, like other figures, it has become less bad by a margin. But as somebody on social media mentioned, the composition of unemployment might be different now, with more lower quality employment coming in. I would quote him directly I suppose because the way he put it is more eloquent than me (translated roughly):

Unemployed pilots, engineers and other professionals working as food deliverers should not be considered as employed. [@The_Eddie. Twitter. August 11 2020]

Here is where underemployment figure would shed light on the matter. DOSM did report it once several months back in the form of working fewer than 30 hours per week. But we need more regular reporting on that front.

So, until tomorrow…

Categories
Economics History & heritage

[2910] Few lessons from post-war 1940s Malayan supply-side crisis

We are experiencing a supply-side crisis. The lockdown is inducing labor shortage, and it has the potential of exerting lasting damage on the economy if not handled properly.

It seems to me that the last time Malaysia or any of its components had a supply crisis was in the 1940s during World War II and during the immediate post-war period. Productions of various kinds were devastated, leaving many without jobs and forced into subsistence. The war not only destroyed productive capacity, but also suppressed demand.

The end of the war brought demand back up quickly. Unlike demand however, production took time to get back to speed. Wars had destroyed all the equipment, and killed off many that worked at the mines, plantations, factories and shops. Rebuilding those and reemploying the workers took time.

That meant massive unemployment in the meantime.

Massive unemployment also meant employers had great bargaining power: wage growth was weak if any. Faced with unemployment, weak wage growth and spiking prices, social discontent was prevalent. This was one of many reasons the communist movement gained sympathy among the masses: industrial sabotage became a norm which worsened efforts to restore production.

There are a few lessons to take from the economics of post-war 1940s. Disrupted supply chain in the form of business failures and labor shedding took time to recover, and could not move as fast as demand. When demand returned with supply failing to do the same, that demand went unfulfilled. This led to massive shortages and subsequently, massive inflation. Never mind the social issues and the complex 1940s political situation.

In this sense, the negative economic effects of the war lasted beyond the war.

Coming back to today, our mines, plantations, shops, offices and other facilities obviously do not suffer similar war devastation. And the social reality is different and undeniably more stable though racial tension that originated from the war continues to linger.

But our current supply-side crisis, now lengthened to 4 weeks, is heightening the risk of business failures and job loss. That means reduced potential and once the crisis is over and demand back up, that reduced potential means shortages and significantly higher inflation, and higher prolonged unemployment. Growth could be depressed for some time until the potential returns to its pre-crisis period. The negative economic effects of this supply-side crisis would last beyond the actual crisis.

This is why we need to protect the potential now. Prevent business failures. Protect jobs. This is so that once the crisis is done, we could press on the demand paddle right away without having to wait for some time to repair the supply transmission. We do not have to suffer a lasting effect of this crisis.

Categories
Economics WDYT

[2822] Guess Malaysia’s 1Q16 GDP growth

I have been slacking off a little bit. My models have not been updated as frequently as it should. Reason is, one fine March day, something wiped the models out. Electrons arranged neatly disintegrated into disorder, destroying the microfoundations (heh!) of my models.

I have backup files, but updating them is a tedious exercise.

So, my projections, especially on quarterly basis might be off for now.

Nonetheless, it does not take much effort to look into the latest data.

And I cannot find much stuff to celebrate.

The full industrial production index for the first quarter is not out yet but for February, production grew only 3.9% YoY. Remember, 2016 is a leap year and in essence, people produced more this year compared to the last just because of the extra day. So normalized growth will be lower than that. At the same time, with all the heatwave going on, I think we also need to discount electricity production spike. It is very likely the electricity generated mostly went into cooling purposes instead of for manufacturing. My electricity bill spiked by about 100% in March. Some of my friends had it worse.

February 2016

I am unsure how much the electricity generation surge is due to mining growth recovery (is it a recovery?) however. I can run a regression model I suppose, but meh. Looking at the lines alone can tell you much about the correlation.

The new core inflation published by the Department of Statistics appears stable, suggesting consumption growth might be stable too. But who knows. With the way economy is going, there might be enough slack that increased economic activities would not affect inflation much. Import expansion for the quarter was uninspiring as well, pointing to the possibility that the economy did not go far enough toward fulfilling its potential. Stable (and low?) inflation and weak import growth mean weak consumption growth.

Export growth is also not convincing by the way.

Government spending growth might be hurting. For most of the first quarter, Brent prices were below $40 per barrel and the government really wanted to cut its deficit still. Things might be better in 2Q16, but not before as far as public expenditure is concerned.

In the end, I think growth might be about the same as the last one. Might be slightly slower too for all I know. In 4Q15, the Malaysian RGDP grew 4.5% YoY.

Maybe you know better?

The Department of Statistics will release Malaysia’s GDP figures on Friday, May 13.

How fast do you think did the Malaysian economy grow in 1Q16 from a year ago?

  • 3.0% or slower (8%, 1 Votes)
  • 3.1%-3.5% (8%, 1 Votes)
  • 3.6%-4.0% (23%, 3 Votes)
  • 4.1%-4.5% (54%, 7 Votes)
  • 4.6%-5.0% (8%, 1 Votes)
  • 5.1%-5.5% (0%, 0 Votes)
  • Faster than 5.5% (0%, 0 Votes)

Total Voters: 13

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