Friday, February 27, 2009

GDP Data

The 2008:04 GDP and January MSB release last Friday basically confirms what everybody knew - a deep fall in trade was the primary channel for the slowdown in growth. Both exports and imports fell off a cliff into double-digit declines. Paradoxically, the net effect was still a positive for the Malaysian economy, with (X-M) at around RM10.6 billion, although lower than the RM19 billion plus in 2008:03 (now tell me that exports and imports aren't cointegrated!).

The real killer though was the consequent sharp fall in investment with capital formation falling to the lowest level since 2006:01 and the worst growth reading since 2001:03 (chart shows log percentage change y-o-y):

The net rGDP growth figure is sure to be revised downwards, and we may find that Malaysia entered a technical recession at this point. Trade data for January is so far not very encouraging, and the RM7 billion stimulus package does not seem to have been fully implemented yet from what I'm hearing. So fiscal policy has yet to gain traction. Monetary easing? Despite the 150bp cut in the OPR, money supply growth is also dropping:

The worse is yet to come? You bet. To be fair, there's not much that BNM could have done in 2008:04 to expand the money supply. Net portfolio investment (BOP data) fell a whooping RM 56 billion in 2008:03, and I can't imagine the fourth quarter to be any better, if the depreciation of the Ringgit is any indicator.

Tuesday, February 17, 2009

Why Individual Income Tax Cuts Won't Boost The Malaysian Economy

Now that the mini-budget has a date (March 10), speculation is increasing regarding what's going to be part of the stimulus plan. One idea that continues to be popular is the personal income tax cut - but as this article argues, the effect might be very small relative to the revenue loss to the government. In other words, there are better uses of the money that might have a greater impact on the economy. I find the line of argument a little confusing though - what the heck does "taxpayers’ role is a small proportion of the total labour force" mean?

Leaving aside the Laffer curve controversy (see:Reagonomics or Bushinomics), there's a very strong argument against using tax cuts to support economic growth. If, as the case should be here, the tax cuts (or rebates as the case may be) are expected to be temporary and will be lifted after the crisis, then rational economic agents would treat any such income as a windfall and save it rather than spend it. This means there would not be any boost in aggregate demand.

In real life, people aren't always fully "rational" in the economic sense - some of it will be spent, even if such spending is not logical and does not maximise utility. This was clear from the first Bush fiscal initiative just after the onset of the crisis, where there was a mini-boost to the economy in mid-2008. Nevertheless the boost was very short-lived, indicating possibly weak multiplier effects and reflecting the fact that the stimulus didn't resolve the underlying structural problems in the financial system.

Another issue with tax cuts is that it will only affect those who actually pay taxes. While I don't have the figures with me, my personal tax experience suggests that the lower-income group will receive little if any benefit from a cut in marginal rates. Unfortunately, this would be the group that would be most effected by the slowdown in growth, and need the most help. I'm thinking this effect is what the article meant by "narrow role of the taxpayer".

More to the point, a 1%-2% cut in personal income taxes won't actually release much money into the economy - at least relative to the stimulus required. Individual income tax only amounted to around RM12 billion in 2007, and under RM16 billion in 2008 for the first three quarters (much less than half of the take from companies). A 2% cut might put in RM1 billion into the economy, most of which would likely be saved. Remember that a cut in the rate effects mainly the top marginal rate, not the tax brackets necessarily. I'm doubtful whether a change in the tax brackets themselves might be effective either.

I'm more of the view that fiscal expenditure would probably be more effective, but that's a post for another day.

Sunday, February 8, 2009

To Be Or Not To Be: GDP, Seasonal Adjustment and Calculating Growth

I came across this article on China's 4Q GDP growth in The Star the other day, which claims:

"The government says the economy grew by 6.8 percent in the final quarter of 2008, but that is based on an outdated system that measures growth against the same period a year earlier...Compared to the previous quarter, the method used by most major economies, growth was as low as 1 percent and possibly zero, economists say."

Beyond the debates regarding how China is actually doing, this illustrates two different methodologies for looking at GDP growth. From my point of view they're both relevant, and in fact when you look at actually statistical releases, both data points are generally published. I would NOT however call the quarter on last year's quarter methodology as "outdated". There are solid grounds for using this methodology as the main point of reference, just as there are weaknesses. As pointed out, it doesn't capture the momentum of the economy very well. On the other hand it's better at abstracting from "seasonal" effects than a mechanical seasonal adjustment of the raw numbers would. How so?

The problem with applying seasonal adjustment to China data, as for any majority Chinese country, is the enormous impact of Chinese New Year on spending and economic activity. Since CNY follows a lunar calender, the effect falls earlier every year. For Malaysia, we also have the additional effects of Aidil Fitri, which also depends on a lunar calender. This presents a problem for seasonal adjustment since the various methodologies use historical data to calculate the seasonal indices. Just as important, adjusting for strong seasonal effects introduce an element of artificiality into national accounts interpretation. In practice however, these factors don't seem to matter much, at least in the data I've been looking at. What does matter is the q-o-q methodology tends to accentuate momentum too much.

To illustrate this, let's take a look at Malaysian RGDP (2001:1 to 2008:3; 2005 prices):
From the chart, the seasonal effect is obvious and persistent. This is what it looks like after seasonal adjustment (using the US Census Bureau X11 multiplicative method):The different seasonal adjustment methodologies yield broadly the same results, so I'm sticking with X11 for now - so far so good. This is what the different growth methodologies actually show for Malaysian RGDP growth:
As you can see, the growth estimates under the q-o-q method is much more volatile than the y-o-y method. The drop is sharpest between 2002:3 to 2002:4, from 12.0% to 2.7%, while other sharp swings are pretty clearly shown especially in the early part of the series. Even using seasonally adjusted data y-o-y shows the same results as the non-seasonally adjusted data, so it's more the growth calculation than the seasonal adjustment. Given this volatility, I suspect that for developing countries at least, the q-o-q method would be considerably less useful as a guide to policy than y-o-y. Even then, take a look at the same comaprison for the US:
The volatility is still there. I'm not convinced this is a better method of showing the performance of the economy, especially as a reference for monetary and fiscal policy. It's too easy to overshoot policy adjustments.

Tuesday, February 3, 2009

Hello World!

The idea behind starting this blog was really two-fold. The first was to have a way to put down and present my ideas, work in progress, and thoughts on the Malaysian economy. The structure of a blog would enforce a more disciplined approach to my explorations of economics, as in, I wouldn't put out anything that didn't come across as reasoned, coherent and backed by data. The second reason was to hopefully attract critiques and feedback, that would help me improve on my own understanding of the way the world works, or at least, this little corner of it.

One way I'm hoping to make this more than just another economics blog, is to really focus on econometrics rather than just commentary. I'm continually discovering divergences between what happens in the 'real' world and the predictions of neoclassical theory (which is what most economics majors learn). This journey really began with my graduate studies, with an exposure to different schools of economic thought. I'm eternally grateful for that, as it really opened my eyes to a different way of viewing things, as well as explaining why, despite the elegant models I learned in school, not everyone agrees on the benefits of trade openess or free markets, for example.

Soo...Hello, World.