Thursday, November 22, 2012

3Q2012 National Accounts: Defying Gravity

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.

Technical Notes:

3Q2012 National Accounts report from the Department of Statistics


  1. Agriculture should go up in the near future. The reason for the weak agriculture growth, at least according to the palm oil plantation companies was "tree stress".

    Production was crazy in the year before and because of that that, production was bad in 2012, coupled with weak demand. I'm donno is "tree stress" is a make-believe, but if it's true, production should go up like crazy in 2013. And palm oil forms about 30% of agriculture GDP.

    1. I dunno about tree stress either, though real output growth in agriculture does seem suspiciously cyclical.

      But if it does, that would mean that next year might have even more frothiness than I originally thought.

  2. Hey Hisham

    Wanna request that you do a post comparing the PR and BN run states in terms of economic performance (GDP, employment) budget management, fihtinh corruption and other measures.

    Is it really true PR has brought a new renaissance to Penang, wiped out state debt and erdaicated corruption? And that Selangor is better now than in the past?

    Not sure if you have all the datas but would lo see make the comparison.

    Thanks and as always, i always enjoy reading your blog.

    I am now seeing that raising corporate tax and personal tax can lead to address income equality. It is a fresh idea for me than the usual middle income trap and eradicate corruption which though positive doesnt solve the core issues.

    1. Abel,

      While I understand the reasons why, I don't think such a comparison would serve any useful purpose.

      Many things go into economic performance, of which governance is only one. Trying to figure out the impact of a difference in government, especially when the data is out of date (state GDP only goes up to 2010), is far from easy.

      For an expanded discussion of this problem, try here.

  3. hisham

    I understand the problem. But i think the comparison would be a good starting point. Especially for a man on the street.

    It is hard enough to discern all the political bytes and misrepresentation of data (balooning government debt whilst ignoring the 2009 recession being the cause for exp).

    1. Abel,

      The state data is available here.

      There's hardly much to comment about. All the states were affected by the recession, and bounced back afterward except for Sabah. Most have growth recovered, or nearly so, to their pre-recession level, except for Sabah and Kelantan. Given that what data we have is just the recession and post-recession recovery (data only goes up to 2010), it's difficult to say whether governance was a factor. In any case, the influence of state governments on economic activity is far more limited than that of the federal government.

      On the debt issue, its true that Penang nearly wiped out its state government debt, but this is also true for nearly all states (again except for Sabah, which has an outstanding RM544 million sukuk issue), due to the transfer of water assets from state to federal government.

      On the fiscal front, as a rule most states (and local level governments such as municipalities) either have a balanced budget or a slight surplus as they are not allowed to borrow without MoF permission. Again, Sabah is the exception. I don't think the state fiscal balance is much of an indicator, as a surplus can be achieved either through better revenue collection or by simply not spending enough on public services.

      With respect to corruption, there's virtually no data to speak of.