1Q2014 National Accounts

A little stronger than I thought it would turn out to be, but not too much so (log annual and quarterly saar changes; 2005 prices):

Don’t go overboard though – the quarterly growth numbers tell the real tale. 1Q2013 was a really horrible quarter, which means growth for 1Q2014 will flatter to deceive. Note that 1Q growth was stronger in 2011 and 2012, but weaker in the last couple of years (including this past quarter).

This chart I think is just as telling (log annual and quarterly saar changes):

Malaysia’s nominal GDP growth has averaged 8.0% since 1997, with a median close to 10%. By that standard, NGDP growth for nearly a full two years (1Q2012-3Q2013) has been substandard – nearly three, if you discount the short-lived growth spurt in 1H2012.

You can blame this mostly on export prices (index numbers; log annual and quarterly saar changes):

The implicit GDP Deflator index has been effectively flat since the second half of 2010 to the third quarter of 2013; given that annual domestic inflation was running at around 2.0% at the same time, that implies a worsening of the terms of trade by the same degree. It’s hard to keep growing when your income per unit of exports is dropping, especially for  a country as exposed to global trade as Malaysia is.

The bottom line here is that growth in 1Q2014 was hardly exceptional, even though the annual growth number seems pretty strong. From my perspective, growth is already slowing down. From the trajectory, it looks like annual growth in 1H2014 will probably outperform expectations; but by the same token, growth in 2H2014 should by rights underwhelm. It’s just the base effect from poor growth in 1H2013.

There’s upside risks to this outlook, because RAPID is set to kick off by the end of this year, so we’ll probably be looking at another uptick in public and private investment. Some of the “weakness” I’m seeing in quarterly growth could be due to the extremely bad weather in the US and Europe over the winter, which has artificially depressed 1Q growth in those economies as well. Also, quarterly GDP growth numbers are notoriously volatile, and depending on one reading too much isn’t a good guide to long term policy-making.

As against that, further subsidy rationalisation will continue to take a toll on disposable income, loan growth is coming off, the property market has been rapidly cooling off, and there’s little sign of inflationary pressures building up.

In short, there’s a whole bunch of mixed signals coming in. The market is expecting BNM to react by raising the OPR by at least 25bp in July, but I think this might just be a mistake. Growth really isn’t as a strong as it looks, and we might be cutting off a broad-based recovery just when it’s starting.

For completeness sake, here’s the view of the economy from the demand and supply sides (log annual changes; 2005=100):

You can read these charts any number of ways, but I’m not as sanguine over the economy’s outlook as the annual numbers seem to imply.

Technical Notes:

1Q2014 National Accounts from the Department of Statistics