Thursday, August 19, 2010

2Q 2010 GDP: Have We Peaked?

What a change a quarter makes – from the optimism from when the first quarter numbers came out, to a much more sober assessment of our chances going forward.

On the plus side, my little forecasting exercise last week didn't do me much wrong. Today's 2nd quarter GDP report from DOS showed real output hit RM138.5 billion, a little under my IPI-based forecast of RM139.1 billion. Growth numbers are a little further off though at 8.9% (actual) against 9.4% (forecast), but that's not too bad compared to the consensus forecast of 8.4%.

Where’s the growth coming from? Seemingly from all sources (log annual changes; seasonally adjusted; 2000=100):


Private consumption rose 7.9%, while investment zoomed to 12.9%. Trade contribution fell, mainly through higher import growth – on a year on year basis, the main drag to growth was a lower trade surplus, as all the other sources of demand accelerated compared to the first quarter.

Looking at it from a quarter on quarter view, this impression gets reinforced (log annualised quarterly changes; seasonally adjusted; 2000=100):


Overall growth stayed steady at 6.5% compared to 6.6% in 1Q, but investment was up 34.7% over the first  quarter, and private consumption grew 16.1%. Exports however dropped 14.6%, which to me is as much an indication that trade in the 1st quarter was probably running at unsustainable levels, as much as a moderation in external demand – probably confirmation of the restocking thesis everyone is in love with right now.

On the supply side, it’s a manufacturing and services story, at least in annual terms (log annual changes; seasonally adjusted; 2000=100):


You can clearly see that the recession was driven mostly by manufacturing, and so was the recovery. This is even more clearly shown on a quarterly basis (log annualised quarterly changes; seasonally adjusted; 200=100):


But the picture has changed somewhat compared to annual growth – manufacturing growth momentum is slowing fast, and it’s services that has picked up in the 2nd quarter. The other sectors didn’t contribute much, if at all.

None of this means a whole lot in terms of prospects for the second half of the year of course. The external outlook has deteriorated markedly in a few short months, not just in Europe and the US, but via the engineered slowdown in China as well. I’m encouraged by the signs of sustained domestic demand, but that’s not going to help much if people’s expectations of further global growth gets dampened and starts affecting private consumption.

One look at the level of real output tends to bear that out (seasonally adjusted, RM billions; 2000=100):


Domestic demand is on track or has fully recovered, but external demand is still way below trend.

One other bad sign I’ve picked up on is a sharp quarterly drop in nominal GDP (log annual and annualised quarterly changes; seasonally adjusted; 2000=100):


One way to interpret this is that prices came down in the second quarter - which is partly true in that commodity prices are off their peaks for this year. But it also implies that nominal incomes have come down as well, even as real output increased. That doesn’t augur well for sustained consumption going into the second half of the year.

Technical Notes:

2Q 2010 GDP Report from the Department of Statistics

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