Thursday, November 13, 2014

3Q2014 GDP Preview

I’m torn. Despite all the weak numbers over the past three months, all my forecasting models say real GDP growth will still be above 5%, and in most cases, above 6%, for 3Q2014 (log annual changes):


The IPI based forecast is probably the most bearish, and it still says we’ll be above 5% – my other models are far more bullish. The forecasts for 4Q2014 are weaker, but not unusually so. The generated forecasts for next year cluster a little above 5% growth, which is about right for the Malaysian economy.

Yet what I’m hearing from the ground, and what with the weakness in export growth and IPI growth, as well as the recent dive in commodity prices and the Ringgit, suggest something quite different.

To be truthful, I’m not overly concerned about growth this year. It’s next year that’s the bigger worry, as we’re seeing a convergence of a number of negative factors all more or less happening at the same time. First is that export “growth” over the past year doesn’t really look sustainable (RM millions):


That looks to me more like a one time upshift than “growth”. The decline in commodity prices (particularly oil & gas) is another reason to be wary. My main concern is that we could be returning to the same scenario as in 2012-2013: a two speed economy largely kept afloat by infrastructure investment and property development, while the rest of the economy stalls. That’s not a recipe for sustainable or inclusive growth, even if the headline numbers look fine.

Second is that loan and money supply growth have been really poor in 2014 (log annual and monthly changes):


There’s evidence of a bounceback, but it’s only one month. There’s no such ambiguity with money supply (log annual and monthly changes; seasonally adjusted):


That just looks nasty.

Third is that, especially if oil prices stay low – which is likely since we’re looking at a US economy heading north (with the USD tagging along), and the rest of the world heading south – nominal GDP growth is likely to underperform relative to real GDP growth. Put another way, the GDP deflator and the terms of trade are going to decline. Translation: we’ll be producing more, yet actually earning relatively less.

And all this on top of a political consensus that government spending has to be cut (and revenue raised). I’m still a supporter of GST, but the timing is less than ideal. We’d have done better to have put it in place this year rather than next year, when the economy was stronger and wage growth relatively robust. To be fair though, given the time needed for implementation and talking people into accepting it, the 18 month timetable was probably inevitable.

All this could be a storm in a teacup. I’m reminded of how it seemed as if there was a downturn coming every year, about this same time of the year. 2011 saw the European debt crisis hitting markets around the world. 2012 was the year of the looming US fiscal cliff. Last year, non-oil commodity prices were declining and it seemed as if global trade was heading into a wall. This year, we’re seeing Europe heading for deflation, and an increasingly fragile Chinese economy. Markets everywhere look overpriced, and ripe for correction.

It may be that this time around, we’ll see some real action from the ECB, and the surprise BOJ QE move last month could be a harbinger of a more robust global economy. There’s a lot of uncertainty, and I don’t know what the impact will be – part of the issue is that for once, the major economies are parting ways in terms of growth and economic policies, with the prospect of a rise in US interest rates, while Europe, Japan and China struggle with deflation. Partly too, it’s because major emerging markets like Brazil and Russia, are struggling mightily as well. There are plenty of downside risks to worry over.

We’ll know more this time tomorrow, when Malaysia’s 3Q2014 GDP report comes out. Enjoy the party while it lasts.


  1. Not very hopeful, is it?

    In a world where one has to contend with the likes of the TPP, RCEP, FTAAP and the Asean Economic Community, what will happen to the Malaysian economy?

    Real GDP growth of 5% y-o-y isn't going to cut it.

    If anything, it's like treading water and paddling desperately to stay afloat.

    1. @anon

      That sounds backward. Why would we need to have higher growth to participate in FTAs? FTAs should boost growth, or at least consumer welfare.

    2. That's too simplistic a comment, Hisham.

      The network of FTAs already in place and being negotiated will leave Malaysia with no choice but to open up it's economy.

      There will be no more "sacred cows" (apologies to the Hindus for using this metaphor) that can be protected, because to do so is asking for retaliation.

      Is the Malaysian economy in good enough shape to be able to withstand this, continue to grow sustainably and provide the good jobs that Malaysians need?

      With sliding oil prices, what will be the effect on a net oil exporter like Malaysia?

    3. @bee farseer

      If you're referring, however obliquely, to affirmative action - it's not on the negotiating table. Not even for the TPP.

      Second, I find it strange that people presume that we need to be in good shape to "withstand" a free trade treaty. Most sectors are already fully liberalised, except for some subsectors in services, which could definitely use some competition.

      Another thing is that I'm totally frustrated that nearly everyone - boosters and detractors alike - are evaluating free trade purely from the production side. Why is everyone forgetting consumer welfare?

      Third, if you're talking about oil alone, trade is effectively balanced already. If consumption continues to increase as it has, we should become a net oil importer in the next few months.

    4. I wasn't referring to affirmative action per se, but since you have mentioned it, it should be relevant to ask if the government can still continue to be "protective" and claim that Malaysia is open and ready for business and investments?

  2. Hi hisham,
    Unrelated to this, there has been allegations of hiding/fudging rm30b of debt reltaed to 1MDB by putrajaya. Could you comment on this please as I'd rather hear a technocrat than a politicians opinion. TQ.

    1. @J

      There's no fudging about the debt, not really. Debt isn't really the issue either. People are only concerned about the debt because there's no clarity on what the money was used for and how it's going to be paid back.

      If in fact there's enough cash flow to cover interest and principal repayments, nobody would bat an eyelid at 1MDB's debts. But as it is, nobody in the market (me included) really has a good grasp on whether that's really true.