Thursday, May 21, 2015

1Q2015 GDP: Something Wicked This Way Comes

I haven’t had much of a chance to write this week, with various things on my calendar (I’ll have some thoughts on the 11MP tomorrow, along with the April CPI). But I wanted to very quickly touch on last week’s GDP report.

The published numbers look pretty good (log annual and seasonally adjusted quarterly changes; 2010=100):


The economy grew 5.5% (in log terms) on a both annual as well as seasonally adjusted quarterly basis, with broad based growth on both the demand and supply side. This is far better than anyone had a right to expect after the poor numbers we saw in January and February.

However, in nominal terms, things don’t look anywhere near as good (log annual and seasonally adjusted quarterly changes):


On an annual bases, NGDP growth has dropped to 4.1% in log terms, while the annualised quarterly growth is just 0.1%. Most of this difference is due to prices – the sharp drop in oil prices (on the export side) and petrol and diesel prices (on private consumption) are limiting nominal income gains. A stark example of this is in the mining sector, which grew 9.6% in real terms, but contracted 5.6% in nominal terms.

This is where the dichotomy between the official statistics and feeling on the ground is coming from. We’re producing more, but getting less (or not much more) in return.

There’s also the continuing anomaly of retail sales, which was reported by DOS to reach double digit growth, carrying over from last quarter. Yet feedback on the ground and from retail associations suggest at best 3%-5% sales. April numbers are by all accounts even worse, due to the impact of GST.

So everyone is thinking 2Q2015 GDP growth is going to suck big time, and I’m no different. My IPI based forecast suggests 3.2% but with a fairly large confidence interval of ±3%, so anything goes here really. We’ll probably see a rebound in 2H15, as oil prices have stabilised higher, but consumer sentiment is pretty weak. I’m thinking we’re probably going to see a repeat of 2012-13, when investment was virtually the only driver of growth.

One last point is that DOS has rebased the GDP series to 2010 prices, from the 2005 used before. As a result, the economy is approximately 3.0%-3.5% larger, with a corresponding drop in deficit and debt ratios. We might actually see the government hit its 3.0% deficit target this year after all.

Technical Notes:

1Q2015 GDP report from the Department of Statistics


  1. Not trying to sound overly sceptical here but would the be any reason to doubt the validity of Malaysia's economic indicators. Inflation and unemployment have seem to remain stable around the rate of 3% post 2008 yet it seems that cost of living is a lot higher and graduates often complain of lack of jobs.

    Any chance that national statistics may be over reporting on the strength of the economy?

    1. @Rahman

      That's one reason why I specifically included the nominal GDP numbers. Real GDP is critical for policy making, but nominal GDP is what people actually experience. Using NGDP, growth has been declining for 3 straight quarters. It's not so much over reporting, but an emphasis on a number that is not really related to the man (or company) on the street.

      On the issue of cost of living, there are two issues. If you look at the detailed breakdown of the CPI components, it actually does conform to people's experience (double digit inflation) but only for food items. Most people don't notice items where there have been price declines, because there are not high frequency purchases (e.g. cars, phones, furniture, clothing). Another factor is that house prices are not included in the CPI, only house rentals.

      For graduate unemployment, see here (pg 171 onwards) for the latest and here for 2009-2013.

      Overall, in percentage terms there's been little change, but the absolute numbers are rising. However, for IPTA, 2012-2013 has seen an increase in both ratio and numbers.

    2. Thanks Hisham! That clarifies a lot. :)

    3. @Hishamh

      Double digit inflation on food items sounds really depressing. What is the base year? 2014?

    4. @MF Mohamad

      No base year required, since we're looking at prices alone and not volumes as well (which would required for determining the CPI). Double digit inflation in food has been around since 2007-2008.
      However, the rate of increase is confined to very specific categories, mainly protein based foods such as meat, poultry and seafood.

      The main reason for this is the massive increase in the Indian and Chinese middle classes as growth in both these highly populous economies brought many out of poverty. That brought changes in diet (from carbohydrates such as wheat, millet and rice to more expensive proteins) that caused a mismatch in supply and demand. Poultry supply is I think finally catching up, but neither beef (and pork) production nor seafood supply have as yet. There's also a secondary impact on dairy products such as milk and cheese.

      In the local context, there's also a (desirable) increase in restaurant/hotel prices, partly as a consequence of food inflation, but also due to higher wages.

      I expect and want to see, higher prices in services industries, because that suggests Malaysia is heading in the right direction as far as transforming into a developed economy is concerned.

  2. Apologies, Hisham - this is going way off-topic, but I was looking at the stats in the OMFIF (Official Monetary and Financial Institutions Forum) Global Public Investor Report 2015.

    The 2015 figures for Singapore's public investors' assets (in US$Billion) are: GIC (333.1), MAS (256.9), CPF (202.5) and Temasek Holdings (177.3).

    That adds up to a total of US$969.8 billion.

    Does that make sense when compared with Singapore's GDP?

    1. @anon 5.45

      Sorry for the late reply, I've been on holiday (without an internet connection).

      That figure is about 300% of SG GDP. Does seem excessive doesn't it?

      It's a function of the public institutional arrangements Singapore has. MAS monetary policy over the past decade and a half has effectively required the continuous purchase of FX (and thus FX assets), while the CPF structure effectively ensures a constant inflow into public funds (mainly GIC I think). Temasek's AUM comes largely from having 40 years of investing, and not having to pay out much (if at all).