Yesterday’s GDP release showed the Malaysian economy continuing to expand, but well below expectations (log annual changes, 2005=100):
Growth was marginally higher at 4.2% (log terms) compared to last quarter’s 4.1%, but it’s hardly a picture of glowing health. Exports have contracted for the 4th straight quarter, while overall investment has dropping to earth to 5.8% compared to the double digit growth rates recorded since 2011. What’s kept growth going is still strong private and public consumption. External weakness is the key story though.
On the supply side, manufacturing showed some signs of life, but the thing that stands out to me is the poor growth in services (log annual changes; 2005=100)
Both mining and construction also recorded growth slowdowns, but the services sector is so much larger that the impact on the economy is greater. Having said that, the services sector contributed more than 60% of growth in 2Q2013. The main laggards in the services sector are motor vehicle trade, finance and insurance as all three contracted in the quarter. Funnily enough, manufacturing of motor vehicles showed a big jump, while communication and retail trade were the main contributors to growth on the services side.
Prices played a big part in this slower growth phase (log annual changes):
Nominal GDP growth is barely breathing, falling to just 1.6% – no wonder people don’t believe in the growth of the economy. The implicit GDP Deflator (which measures price changes across the whole eocnomy) has now hit negative territory for a third straight quarter:
The deflator is now running 4.3% below CPI inflation, which gives you a pretty good idea of the hit on incomes. There’s some fairly serious implications on the budget deficit and government debt targets as well – slowing nominal GDP growth changes the denominator, which means both deficit and debt ratios will rise, even if the government hits its absolute deficit target squarely. I think we need to look for a pullback in public expenditure over the coming two quarters.
One interesting about yesterday’s data release was the inclusion for the very first time of official seasonally adjusted data for GDP. Here’s what the differences are, shown side by side:
The blue line is unadjusted and year-on-year, while the red line is seasonally adjusted quarter-on-quarter and annualised (as per standard international practice). There’s some minor differences with my own rough and ready seasonally adjusted data that I’ve used previously, but the DOS figure is more rigorously calculated (there’s a briefing today at BNM about the methodology).
A c0uple of things of note are just how bad the 1Q2013 numbers really were, and the relative recovery in 2Q2013 – so things aren’t quite as gloomy as they seem.
As far as my forecasting models are concerned, this is the third straight quarter where the generated forecasts have missed the actual by more than one standard deviation (two forecasts over estimated, one under), and this quarter’s miss was the worst of the three and the worst forecast error since 1Q2009.
I have no reason to abandon or modify them just yet however; partly because the 2Q2013 realisation was within the 95% confidence interval of the generated forecast – barely – and partly because I’ve yet to devise anything better. They forecast 3Q2013 GDP to keep showing growth and at a faster pace than in 2Q2013, but not much more. Point estimate is at 4.7%, and range forecast is between 4.1% to 5.3%.
2Q2013 National Production and Expenditure Accounts from the Department of Statistics