Well, I’m back from my break, and what an interesting bunch of numbers to come back to. The national accounts data released last Friday showed the economy chugging along at 5.2% in 3Q2012 (log annual and quarterly changes, seasonally adjusted):
There really hasn’t been much variation in the growth numbers either on an annual or quarterly basis since the beginning of 2011, indicating a trending economy.
The question everyone seems to be searching the answer for is, why? Given the significant deterioration in the external sector, domestic demand has filled in the gap in keeping GDP growth in line with potential. Much of that has been coming from high investment growth (log annual changes):
…although sustained private consumption is also part of the story. But while that explains where growth is coming from, it doesn’t explain why.
I’m not convinced that the government’s higher rate of transfers (e.g. BR1M) or higher civil service pay is a big part of the answer, at least in terms of sustaining GDP growth on trend. Even if this results in higher private consumption (probable), the reduction in the fiscal deficit over last year’s should be net growth negative for 2012 even after taking into account the private consumption boost i.e. in aggregate, there wouldn’t be a boost to overall GDP growth but a brake.
Transfers and the like are being offset by lower public consumption. If there was a fiscal multiplier effect, it should in fact work in reverse. Even in terms of public and private investment, some or all of it is being offset by higher imports of capital goods.
Which leads back to the interesting question of, what’s keeping growth up? Especially since we’re seeing growth in other countries in the region falling flat?
And the answer to that is, I suspect higher investment is feeding through into sustaining consumption spending, even if the notional value is being offset through external “leakage” i.e. imports. Note that imports of consumption goods have also started rising lately.
A look on the supply side isn’t any more revealing (log annual changes):
Manufacturing is still growing but at an anaemic 3.2% pace in log terms, while services growth has accelerated. Construction is zooming along, but the direct contribution of construction to growth is pretty small.
Is there a significant rebalancing of the economy towards domestic demand? I don’t necessarily think so – this spate of investment will continue into the foreseeable future, but it’s not really coming from the sort of structural shift in the economy that happened in the 1990s. Rather, much of it is in infrastructure, residential and commercial building that should peter out by 2017. Insofar as that will reach natural limits (returns on capital employed should fall as the capital stock increases), this isn’t a long term shift to an economy driven by higher investment.
Frankly from my point of view, that’s not all bad – investment in the early 1990s from my point of view was overly excessive and one of the key contributors to the 1997-98 crisis that followed. The higher capital stock should elicit an eventual response in terms of higher productivity and output, but at a more sustainable pace.
Having said all that, what I’ve discussed here suggests that growth will continue to stay on trend for 4Q2012 and beyond, and into 2013-2014. If anything, the tendency would be to for the economy to be a little too frothy, with the impact mainly being felt through a reduction in the trade balance rather than in prices.
Also we’re going to be looking at a two-speed economy here, with services and construction really driving growth while manufacturing, agriculture and mining taking a back seat for the interim. But that’s as far as my crystal ball will go these days.
3Q2012 National Accounts report from the Department of Statistics