So much for optimism. Yesterday’s report from DOS had 3Q real GDP (RM141.9b) right on the number predicted by the IPI (RM141.8b), which means the economy actually shrank. Not as bad as Singapore’s, but still…
The growth numbers weren’t quite as bad as I forecasted (though still way below the consensus estimate of 5.7%) with the GDP up 5.3% on the year and –2.6% on the quarter, but that’s because of something negative not positive, as 2Q 2010 real GDP was also revised downwards by RM30 million.
So, what happened? Softening external demand is of course part of the story, but believe it or not, on the demand side the second biggest marginal contributor to the drop in GDP is…public spending!
(log annual changes; 2000=100):
While both exports and imports fell, the actual net contribution from both dropped just RM650 million at 2000 prices (seasonally adjusted), compared to a RM1.9 billion drop in public consumption. Combined, the two basically swallowed flat investment and a RM1 billion increase in seasonally adjusted private consumption.
A quarter on quarter look at the same data shows these trends more clearly (log quarterly changes; seasonally adjusted; annualised; 2000=100):
Public consumption well and truly crashed in 3Q 2010, to the tune of –35.0% in log terms. If I had a thesis for this I’d guess that the Euro sovereign debt crisis, which came to a head in May, may have given the Treasury a scare. It’s not just in terms of spending either, as MGS issuance has also slowed a little in the past few months.
It’s real easy to see the impact from the levels (seasonally adjusted; RM millions; 2000=100):
Private consumption barely budged during the recession, but trade and investment dropped then recovered. I’d judge investment to be about on its long term trend, but neither exports nor imports are anywhere near theirs.
What’s interesting is what happened to public consumption. I’ve documented elsewhere that government spending was never boosted by the fiscal stimulus packages introduced in 2008-2009 – these were offset by spending reductions in other areas. The increase in the fiscal deficit was mainly a factor of declining revenues as the recession bit into tax receipts. But overall spending itself continued on its long term trend.
But now we’re seeing something completely different, bearing in mind we’re only looking at one data point here. The 3Q reading for public consumption is way off trend – about 3 standard deviations away from its predicted mean. In probability terms, that’s about a three in a thousand chance of seeing that occurring. In other words, this is no longer business as usual and may signal the first evidence of what the NEM and ETP has been promoting – that the government will no longer act as consumer of last resort for the Malaysian economy, and it’s up to the private sector to pick up the slack.
On the supply side, the only bright spot is construction, which zoomed 11.2% (log quarterly changes; seasonally adjusted; annualised; 2000=100):
But construction is pretty small – a little over 3% of the economy – and it can’t hope to overcome the negativity in the rest of the economy. The services sector did have a positive contribution to make (+RM475 million), but again it’s a bit of a drop in the bucket. It’s obvious to see here the impact of softening external demand, as the other three sectors are heavily exposed to trade fluctuations.
Looking forward, I think the worse is over and we’ll see growth accelerating again, but I’m not making any bets beyond 1Q 2011. The external outlook is still uncertain, and how much domestic demand can pick up the slack is debatable. There’s all these construction projects due to kick off next year (e.g. MRT, Warisan Merdeka), but 1) there’s going to be a lot of leakage from capital and raw materials imports, and 2) the impact will only begin in the second half of the year.
So the government’s growth target of 5%-6% for next year continues to be iffy in my eyes.
Technical Notes:
3Q 2010 National Accounts Report from the Department of Statistics
Posts
Hi Hisham H,
ReplyDeleteThat was a a great story. As to the public consumption drop off, I think its a bit political. My guess is to make sure the contractors are as hungry as possible and to dish the money 2 quarters before election. (My thesis).
But interestingly, with the ETP being funded more and more by Government, shouldn't this in spirit be considered "Public Consumption" even though technically its not? Or is public consumption just for purchase of supplies and services and not the development budget
On the NIPA level, I don't think there's any distinction between types of fiscal expenditure. As long as its the government spending, it falls under public consumption.
ReplyDeleteAlso, I don't know if I'd attribute the drop in spending as a political ploy to conserve ammo for the next GE. We've had GE's before without this kind of drop off in fiscal spending (note the charts I posted cover the last ten years).
But we'll find out more when the 3Q fiscal numbers are published by BNM next week.