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.