Bank Negara held the Overnight Policy Rate at 3.00% yesterday, as widely expected. I tried to explain it fully at Asean Confidential (Sorry, you have to pay for that. I gotta pay for my nasi goreng).
But what if the OPR had purely tracked the Taylor rule?
The drop is due to slower GDP growth and low inflation. I expect both to accelerate later in the year and so, you can see the Taylors rule rate creeping up.
I do not expect the Bank Negara to follow this particular Taylor rule of mine because there are some deficiencies with it. The rule at the moment uses full GDP growth and headline inflation. I want to fine-tune it by replacing the two factors with domestic demand and core inflation respectively instead but… I have been too lazy to do that.
But in any case, for first-pass rough analysis, I think this particular model does help in an actual crisis. Drastic Taylor rule rate movement leading to stabilization at some rate did precede OPR movement.
This chart can be a bit confusing but it essentially shows the contribution of the four GDP components to Malaysia’s overall real GDP growth.
This is exactly the reason why I said it was all government spending previously (okay, all is not exactly accurate. It was a significant contributor, if you like). You can see how the government spending portion suddenly appeared strongly in the second quarter of 2013, while investment and consumption’s contribution shrank. Change in net exports was less bad but in terms of year-on-year contribution, it was less than the change in government spending by a huge margin.
Why did government spending go up?
It was the election as mentioned before (by the way, just to be clear, government spending here is more than federal government spending. Federal government spending was really decent, in contrast of the GDP numbers).
In some ways, the election was a de facto stimulus for the economy. The timing of the election was a fortunate accident. Overall growth would have been far worse without the increase in government expenditure. I calculated that if there were no government expenditure growth at all, the GDP would have expanded by about 2.0% YoY only.
Malaysia’s GDP grew 4.3% YoY in the second quarter of 2013, slightly faster than 4.1% YoY in the previous quarter.
While it is faster growth, I find the numbers worrying because if it was not for government spending, overall growth would have been much worse. Investment growth was down, private consumption was down and exports contracted.
The government spending was just because of electioneering. Election saved Malaysia. Really (This can be confusing since federal government spending actually decreased from a year ago. Yea, I was surprised to find that out. The GDP government spending includes non-federal government spending. Please take note of that).
The good news is that, I think things will be brighter from now on. Investment should increase because there is more political clarity moving out of the second quarter.
It is that time again. Malaysia’s Department of Statistics will release the second quarter GDP figures on August 21. Growth in the first quarter was 4.1% YoY no thanks to eroded trade surplus. Domestic demand however held up well and prevented the growth figure from being worse.
The situation on the trade surplus front has worsened tremendously over the second quarter. In fact, some private economists are fretting over the possibility of Malaysia experiencing its first trade deficit in a long time as exports have been doing really bad.
I think exports will improve in the second half of the year. Imports of intermediate goods have grown faster in June while imports of capital goods contracted less badly. I think these figures say something about future exports since Malaysia re-exports a lot of its imports.
In any case, there are some indications that domestic demand growth finally slowed. I have some expectations that bad news on the external front will affect domestic demand. It has not happened so far but we will see soon how domestic demand grew in the second quarter.
The upside is that government spending could prove to be an important driver of growth in this quarter, mostly because it was an election quarter. For the same reason, investment might grow slower.
There is also base effect to worry since in the 2012 second quarter, growth was 5.6% YoY. While it is a mathematical artefact, it does highlight how hard it is for the GDP to grow faster than it did previously, especially in this kind of environment. This is a case for somebody to develop seasonally adjusted GDP, but that is another story for the wonks.
Ultimately, I expect growth to be about the same as last quarter, if not worse. I will be surprised if growth is anything greater than 4.5% YoY. What about you?
How fast do you think did the Malaysian economy grow in 2Q2013 from a year ago?
Loading ...