Wednesday, May 14, 2014

The REAL Impact of the ETP: The Recession That Never Was

Following on from the 2013 annual reports and quite apart from any benefits that might accrue over the next few years, this is what the ETP has done for Malaysia (RM millions and log annual changes; 2005 prices):

01_gdp

02_gr

I still remember, late in 2011 after the government budget announcement, just how pessimistic everyone was. The Euro debt crisis had gotten into high gear, export growth had dropped off, and growth estimates were being cut drastically. The MOF forecast of 5% growth was met with disbelief and derision.

Yet, growth actually did better than that, hitting 5.6% for 2012 and 4.7% in 2013. If the economy was only export driven, we would have done much, much worse. The counterfactual I estimated above (basically forecasting GDP based on export numbers) suggests the economy would have entered a shallow but prolonged recession beginning in 3Q2012 and only ending in 3Q2013. The difference in output from the beginning of the Euro debt crisis and the end of 2013 is a not insignificant RM105.6 billion, or about 13.4% of 2013 GDP.

Lest one think Malaysia’s growth wasn’t unusual, here’s what happened to the Asian Tiger economies over that same period (% yoy):

02_growth

Only Malaysia avoided a sharp slowdown in 2012 and subpar growth in 2013 – every other export-oriented economy in East Asia (save for China) basically tanked in 2012, and showed higher growth in 2013 only because 2012 was so bad.

Growth around 5% is around Malaysia’s current long term growth trend, so in that sense, Malaysia’s performance over the last few years is nothing special. But taking into account the decline in world trade over that same period, it was on the contrary pretty extraordinary. Even if you take away the assumption that policy is exogenous (i.e. the government wouldn’t react to the slowdown in the economy), any such support would have been expensive and a pretty hard blow to fiscal stability.

Who says the ETP is a failure?

Technical Notes:

  1. Malaysian GDP data from the Department of Statistics
  2. Cross country comparison data from the April 2014 edition of the IMF World Economic Outlook

24 comments:

  1. Nobody else among the Asian tigers building infrastructure(MRT, ERL & subway) at 3x to 10x normal price..

    So its Keynes' fiscal overspending that did the job

    ReplyDelete
    Replies
    1. @anon

      Public spending on infra is being spread out from 2010 to 2020. Public investment was also mainly flat between 2012-2013. Sorry, your contention isn't supported by the data.

      Delete
    2. Hisham,

      I don't think we can rule out anon's assertion here. Total value of construction work done has increased during that period (page 5 of the link):

      http://www.statistics.gov.my/portal/download_Construction/files/Construction/QCS_Q1_2014.pdf

      But if you strip the data down further it's privately-owned construction projects (although the numbers look to suspiciously flattish for Government works) which lends a bit of evidence on your side.

      My worry now (as it was previously, approx 2 yrs ago) is that capacity constraints in the construction sector will affect the other sectors of the real economy...basically crowding out financial/physical capital and labour resources. Haven't seen any evidence thus far, and would hopefully like for it to be maintained this way.

      P/s: Haven't been participating in your blog's discussion in a while, been swamped at work.

      Delete
    3. Jason,

      I'm not dismissing construction, or even public related infra spending, as a big factor here (it should be noted MRT Corp falls under public investment).

      I've seen the same numbers you've noted here - there has been a significant pickup in private sector construction. But if you look at the detailed GFCF breakdown in the national accounts releases, investment in machinery and equipment isn't lagging far behind either. The share of M&E in investment hasn't fallen much the last few years.

      BTW, is there anybody going to be taking Dr Yeah's place? He's irreplaceable, I know, but has anybody been tapped to head up your economic research side?

      Delete
    4. The short answer for your questions re: Dr. Yeah is "yes, but it's definitely not me (phew!)"

      Not enough PHD private sector economists here, I realize.

      Delete
  2. This hardly news let alone jaw-dropping, given that domestic consumption has supplanted exports as the main driver of growth over the past ten years. In fact, using the ‘Import-adjusted’ method wherein GDP =(C-mC)+(G-mG)+(I-mI)+(X-mx) one would compute that private consumption accounted for approximately 30% of GDP in 2012 compared to 25% in the 2005 while export’s role had diminished by 7% over the same period.

    On a CAGR basis, domestic demand accounted for 9.1% or 75% of all growth, a figure comparable to the 9.2% CAGR in 2007-2008. So you could say, domestic demand’s emergence is nothing to do with ETP which only started around 2011 or so.

    So where did this surge in private consumption come from? The simple answer is debt.

    For instance, from 2011 to 2012, household debt/GDP climbed from 75.8% to 81.1% in 2012 and 82.9% in 2013 and the last I heard, still climbing. In fact, household debt has been climbing in tandem with private consumption patterns since 2008 from 60.4%. Thats the reason for BNM's recent warnings about the OPR as reckoning is fast approaching...hahahaha

    http://www.reigroup.com.my/wp-content/uploads/pdf/resources2/Maybank%2020130712_MIB_4606-1.pdf

    Finally, another interesting thing that emerges from available data is the sector that contributed significantly to this growth in domestic demand. By using input-output coefficients, one can compute that construction had a domestic orientation high of roughly 84%-86% in 2012. Meaning the real driver of private consumption was errr…property ..not ETP

    Warrior 231

    ReplyDelete
    Replies
    1. Warrior,

      Where have you been hiding? I missed you man.

      I was going to write a whole bunch of stuff about multipliers, property and household debt (there's a reason why I included a cross country comparison), but I think this will suffice:

      http://www.bnm.gov.my/files/publication/ar/en/2012/cp01_002_box.pdf

      Essentially the same framework you are using. The key point is that while the share of net exports has fallen, it's still a massive 54% of 2011 GDP, instead of the 9% implied by the national accounts numbers. While private consumption is an increasingly important contributor to growth, it's not the only or even the biggest driver.

      Delete
  3. Not hiding dude. Just took a long break from virtually everything to enjoy the sun, the sky, the birds and …of course the ‘grass’..heavenly. Yeah..I missed your blog too though we often clash xcepting Spork….hahahaha

    Putting aside the grade A pot and Spork for a moment, your link merely affirms the shift I mentioned. In fact, it goes on to show that domestic demand accounted for a sizeable (75%) of GDP:

    “Since the crisis, it is evident that the growth of domestic demand has strengthened signifi cantly while the performance of external demand has remained sluggish. From an overall growth perspective, the relative resilience of domestic demand has partly cushioned the economy from the adverse effects of the slowdown in exports.

    The net contribution of each demand component to the growth of domestic value-added is estimated in Chart 5 using the import-adjusted method. Private consumption has played an increasingly important role in driving growth, particularly since late 2006 while investment has recorded markedly higher contributions to growth since 2011.” (page 36-37)

    And aggregated with public consumption and investment, domestic demand accounts for 46% (or almost half GDP) of the economy in 2012 of which private consumption amounted to 29% ……so that’s almost a third of GDP.

    My contention is given the relatively “loose” monetary policy of low interest rates, there has been a prolific growth in private consumption facilitated by easy credit ergo..the spike in household debt being a prime example (of course, non—household debt also grew though notably lower).

    Given the growth in construction, which Jason pointed out is private driven, it is lil wonder properties with all its ancillary multipliers played a primary role in the “abnormal” GDP growth story rather than ETP.

    My concern is not so much of Jason’s crowding out effect (which I think would be manageable) but rather how long can the legs of domestic demand hold up.

    My hunch is when the new OPR kicks in and cools borrowings ergo property & equity speculation and GST crimps discretionary spending, and household finances get a rough workover, “funk-y” time would become the norm. But Malaysia could just get lucky as usual....if the US, the EC and China crawl outta their own funk real soon.

    And in the while, I await, salivating, as to your thoughts on this:

    http://www.adb.org/sites/default/files/pub/2013/ewp-345.pdf

    Warrior 231

    ReplyDelete
    Replies
    1. Warrior,

      Bear in mind that the data covered in that box article includes the exact same period that I've covered in my blog post. In fact I can justifiably argue that it in fact fully supports what I've written.

      Some other points:

      1. Non-bank credit in fact grew faster than household borrowing in 2011-2012. Household borrowing after the crisis has generally been slower than before the crisis, except for the past year or so
      2. I've noted in my reply to Jason that non-property investment was also high and grew nearly as fast as property investment
      3. Household debt has risen across East Asia, not just in Malaysia. Interest rates across the region are low, near zero in HK and SG for example. Yet, there's nothing like the same domestic demand response that we saw in Malaysia.

      In other words, the internal and external environment facing Malaysia and our peers was broadly the same (property price inflation included), and the response by households was nearly identical...yet only Malaysia saw an increase in growth.

      As for the ADB paper, as with many papers on this subject, it struggles with a definition problem. We seem to be held to a double standard. If any other national social security organisation held ownership stakes in public companies, those companies are not automatically classified as GLCs. For example, would any of these qualify?

      Yet in Malaysia, the association is taken for granted, even if there is no "link" apart from the fact of ownership, and despite the fact that in most cases, the funds utilised are not the government's, but pensioners, employees, investors and savers.

      Delete
    2. My oh my…I am barely back and here we go onto another skirmish again….hahahaha

      1.The reason I think the box supports my narrative is simple. It shows that domestic demand as a driver of GDP is not a new phenomenon.

      Sans ETP back in 2007/2008, we still had DD as a key driver, CAGR for 2007/08 being 9.2 is comparable to 9.1 in 2011/12. Not much difference there.

      Charts 4 and 5 here : http://www.bnm.gov.my/files/publication/ar/en/2012/cp01_002_box.pdf would validate my contention.

      2. The prolific growth in HH debt is a wholly SEA phenomenon. South Korean HHD growth over the period from 2008 to 2013 was a piddling 7% in fact, from 2011 to 2012, it was a mere 2%.(http://www.koreatimes.co.kr/www/news/biz/2014/03/488_152631.html)

      Malaysian HHD grew a whopping roughly 26% in the same period (2008-2013 when it hit 86% (http://www.reigroup.com.my/wp-content/uploads/pdf/resources2/Maybank%2020130712_MIB_4606-1.pdf). Thus, only a valid comparison with a similar scenario would be reasonable. Thailand is the only country with a comparable growth to Malaysia’s . Increasing by 25% from 2008 (55% to GDP ) to 2012 (77%) and topping 80% last year.

      In fact, the HHD profile between Thailand and Malaysia in 2012 was almost identical
      http://www.nationmultimedia.com/business/Thais-household-debt-jolts-S&P-30218322.html.

      Given the high growth in debt, isn’t is it surprising that Thai GDP = 6.5%(2012) and Malaysia’s ( 5.5% in 2012) and there is no ETP there in Thailand and especially when both countries’ HHDs expanded by 13% and 6.5% respectively.

      So what is the nexus for HHD and growth? In Malaysia= The construction sector, read property, as stated earlier.

      These will firm up that nexus and the sobering reality:

      1.http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/c3.pdf

      2.“Debt-fuelled spending is pricey”- CIMB

      Finally, the whole focus of the thesis is misdirected. The Tiger economies sans Malaysia are export dependent and given the limited upsurge in their HHDs and other internal debt surges, their domestic demand remained tepid ergo slower growth. Not so the case of Malaysia and Thailand. In fact CIMB has a good take on this: see “Debt-fuelled spending is pricey” again

      3.Finally the myth about ETP bringing in foreign investment. If one looks at the bubbles in the link below what is noticeable?:

      http://www.thestar.com.my/Business/Business-News/2014/05/13/ETP-hits-maturity-phase/

      No prizes for guessing the nexus with QE and its diminution.

      Warrior 231

      Delete
    3. Warrior,

      1. You're getting mixed up. The fact of DD supporting the economy is precisely my point. The real question is why - you're assuming its exogenous, I'm assuming its endogenous.

      2. Actually, Singapore's HH debt grew even faster and for a longer period. I'll grant you Korea, though it should be noted that non-bank credit to households was growing at double digit rates. It should also be noted that Thailand's external trade sector is orders of magnitude smaller than Malaysia's.

      Sorry, haven't got time for big debates anymore, but feel free to comment further.

      Delete
    4. 1. Basically my contention was this. That irrespective of ETP or otherwise, domestic demand was already a prime driver of growth as way back as 2007.

      Your suggestion is ETP is the catalyst; mine is increased private consumption by debt /easy credit with property being one of the titillating factors.

      How the data bears out each contention is for the readers to decide.

      2. In relation to (1), one should also note the 4% increase in Private Consumption in chart 3 in the BNM box linked below.

      Is it the result of ETP induced income fueling consumption or debt “created” income fueling consumption?

      Again the readers can make their judgements based on the data from these two sources.

      a. http://www.bnm.gov.my/files/publication/ar/en/2012/cp01_002_box.pdf

      b. http://www.reigroup.com.my/wp-content/uploads/pdf/resources2/Maybank%2020130712_MIB_4606-1.pdf

      Chart 5 in (a) shows two periods of PC growth either side of the GFC of 2008. (b) shows household debt growth within the same time frame with 2008 being a watershed year also. Observe the patterns. I will leave it at that.

      3. As for Thailand, the last I checked, this is what I got:

      http://www.bot.or.th/English/EconomicConditions/Pages/index.aspx

      You accede on Korea and cite Spork as a counterpoint.Actual growth figures for Spork rose roughly 2% on average in the period under discussion (granted sudden spikes in certain years):

      “Domestically, household debt increased to 77.2 percent of gross domestic product as of March 2013 from 64.4 percent at the end of 2007, with private property prices growing 120 percent during the same period.”

      But the Sporkian government already made a preemptive strike against property overheating since 2010 to 2011, so there was less incentive to leverage on asset price appreciation for “partying” in 2012, ergo tepid growth.

      The list of measures on property can be seen here in page 23 here:

      http://www.imf.org/external/pubs/ft/scr/2012/cr12248.pdf

      and a premonition of things to come is envisaged here:

      “Following successive rounds of policy tightening, together with external factors, home prices haveremained flat since end 2011, while the volume of transactions has declined noticeably. In particular, the share of foreign buyers collapsed in Q1:2012 to 5½ percent as a result of new macroprudential measures targeting foreigners and weakening external investment sentiment, with buyers from China falling by nearly 50 percent. The more-than-proportionate decline in purchases by Mainland Chinese may reflect the impact of the economic slowdown in China. Transactions in the luxury market have also fallen”
      .
      Also : http://www.asean-cn.org/Item/5541.aspx

      Besides, a raft of other measures to cool nascent inflation were also instituted that added to falling wage growth (2.3% compared to 5.8 average in 2010 & 2011).

      You can find the data sprinkled here, there everywhere here:
      http://www.mas.gov.sg/annual_reports/annual20122013/pdf/ar2013.pdf

      And my narrative tallies with the prognostications of Mathur here:
      http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={697915680-16684-4254266619}

      Or maybe, Sporkians were overreacting after all , to give them some credit ;D :

      http://www.btinvest.com.sg/blogs/2013/10/17/where-is-the-excessive-borrowing-pt-1/

      wow….with a balance sheet like that (if its believable ;D )

      But even with all the above, domestic demand held up if you read the MAS report above.Anyway, one is still left wondering as to the actual size of the domestic demand side of the Sporkian economy before any valid comparisons can be made. Hope anyone out there has the data to work out the figures.

      Warrior 231

      Delete
    5. 4. Which brings us to the question , why are my comments running against the grain, as a pal who follows your blog avidly voiced to me in private.

      Nope, I am not being contrarian or plain vexatious for the sake of it. I have no interest whatsoever in belittling any initiative.

      I am beyond that, self sufficient in more ways than one, alhamdullillah – as free as a bird can plausibly be, independent to choose whether to work, play, trap some birds or shoot the supergrass…hahahaha.

      My comments here is because I care for Malaysia as the guy or the gal next door even though I can cash out my Green card and walk away. I am just saying it as it is; our economic policies are inchoate, piecemeal , directionless when there are so many potentialities out there where we have a head-start in and which we can better explore to offer people like “Captain” etc the good jobs, salaries, lifestyle they yearn. And I thank you for affording us this blog to say and disagree about it civilly.

      ETP will probably not do the trick because it is based on a flawed premise although I would love to be proven wrong. I will even venture to say we are sleepwalking into another version of 1997 albeit with some modifications in the scenario here and there.
      The CIMB report I linked yesterday says as much.

      There is a need for a strategic reevaluation of where we are heading, as to whether the models of growth we are adopting and the trajectory of the social engineering approaches are correct or ideal.

      There is no malice intended in my comments. I stand for united, progressive secular Malaysia upholding the 1957 constitution and wedded to the Social Contract plus the ideals and principles of the NEP.

      But I am pragmatic enough not to blinkered by partisanship.

      In my comment above, I have commented on Spork proactiveness which is anathema to my conscience but I don’t begrudge them the plaudits when they are deserved.

      Misgivings about Harry and sons aside, the shenanigans of its financial architecture etc notwithstanding, I respect Singapore for its iron-fisted approach to political discourse, its continued wielding of the ISA and its lip service to democracy plus its astute management of its economy, no matter how shambolically diabolical the innards may be.

      Wish Malaysia was the same…err…I will stop the rant and leap off the soapbox.
      Apologies for baiting your goat, dude. ;D
      and dont worry, I do understand the time constraints.

      Warrior 231

      Delete
    6. Warrior,

      I think the latest BNM Annual Report has got you covered for your first and second question (I think) ref: Table 1 and Chart 5

      http://www.bnm.gov.my/files/publication/ar/en/2013/cp04_001_box.pdf

      It's still disposable income that's the major factor in driving PC. Housing wealth and Financial wealth has increased in prominence but according to the policymakers are not evenly distributed. Consumption credit not quite as much as I expected.

      Delete
    7. Thanks, Jason. Additionally, this might shed light on the implications of credit expansion:

      http://www.bnm.gov.my/files/publication/fsps/en/2013/cp01_001_box.pdf

      Given the acknowledged limitations of current methodologies in assaying the "risks" of credit expansion (pages 23 and 24), perhaps we should accept the assurances on page 26 at face value and move on ;D

      2. Another interesting portion would be pages 15-32 and maybe some more here:

      http://www.bnm.gov.my/files/publication/fsps/en/2013/fs2013_book.pdf

      The key takeaway being HH borrowing increased by 13.5% in 2012 (page 15) and from Chart 1.4, roughly 65% were for the big ticket items of property (44%) + Cars?? (hire purchase:18%) + credit cards (4%). Throw in personal financing (17%) and you can figure where the PC component of DD is getting its fillip from.

      Warrior 231

      Delete
    8. Warrior 231, I sense mellowing, too much grass???

      I share your exact sentiment and indeed looking back I was dead against all the handout like BR1M etc, but later I noted the downturn approaching in 2011/2012, so I think actually these handout helped the economy somewhat (cushion / soft landing).

      And of course were all these part of ETP or not that is the debate here, your words ...Is it the result of ETP induced income fueling consumption or debt “created” income fueling consumption?....

      Hmmm..... time will tell, I suppose.

      Delete
    9. Warrior,

      I've been debating whether to issue a substantive reply, but I've decided against it as it would not be fair to you or other readers. Some of the data I'm basing my conclusion on is not in the public domain, so I'll leave it at that. Suffice to say, I'm still confident my conclusion is correct.

      @anon 11.34

      Actually, the impact of BR1M was at best minor.

      Consider that BR1M is in effect a government transfer (financed out of income, not debt), and that the government was also reducing its expenditure at the same time. Given that our government spending has a marginal propensity to consume (MPC) of 1 (they spend everything they earn), but consumer MPC is on average 0.5, the net effect was likely to be slightly negative.

      Also, from an aggregate national accounts perspective, BR1M is just too small, almost a rounding error.

      Delete
  4. Hello Warrior 231, nice to read your comment.

    As usual interesting rebuttal. Take care all.

    Zuo De

    ReplyDelete
    Replies
    1. Thanks Zuo De. Nice to touch base with you too.

      regards
      Warrior 231

      Delete
  5. BTW, Hishamh, your view on Piketty's Capital in the Twenty-First Century, please.

    Thank you.
    Zuo De

    ReplyDelete
    Replies
    1. Zuo De,

      No promises, but I'll try. I got the copy last month, but 700 pages is a lot to wade through. I wish there was an audio version.

      Delete
    2. Bloomberg columnist Clive Crook authored an interesting commentary "Taxing global wealth is not a joke". Google it.

      In it, he commented on Pikkety's "Capital In The 21st Century" and said "it has been vastly overpraised", but that his proposal for a global wealth tax " that has been roundly dismissed by fans and critics alike deserves to be taken more seriously".

      Crooks writes that "on grounds of equity and efficiency, it makes sense to tax wealth".

      What do you think?

      Delete
    3. ck,

      A wealth tax is a fairer and more efficient way of taxation. I have no issues with it on that score. As a tool to manage inequality, I think there's none better.

      My problem has always been enforcement. It's much harder to do than an income tax, where for instance, governments can mandate deduction at source. A second issue is valuation, where asset price volatility means that the value of wealth can fluctuate from minute to minute, much less from year to year.

      Delete
  6. It seems to me that all the ETP's "low hanging fruits" have been plucked already.

    Aided by generous doses of "pump priming" by the government.

    Now comes the hard part. Real and significant economic restructuring. A full-blown reform of the education system. Dismantling of the subsidies regime. Getting the government out of business and into governing and providing the right environment for the private sector to grow and provide the hundreds and thousands of good (and well paying) jobs that Malaysia needs.

    All this in an environment where competition is heating up and the regional political arena isn't exactly friendly.

    ReplyDelete