It’s been a while since I posted. There hasn’t been a lack of material to talk about – BNM’s and the Government Transformation Program (GTP) annual reports for starters. But I’ve been inordinately busy this week, and I won’t be able to post until late next week at the earliest.
If I’m allowed (and I can get over the jet lag), you’ll find out why then.
If anybody wants to complain about inflation now, be my guest. For the first time since late 2009, the CPI is now back on its long term trend (log annual and monthly changes):
Fun, fun, fun. Just like with the CPI, the Department of Statistics has revised the basis of the leading, coincident and lagging economic indicators. The good news is that they’ve rather nicely recalculated the time series for all three based on the new components, and added diffusion indexes. The bad news is that this means a lot of input work for me.
So you’ll just have to read their own take on it, for now.
I’d also call attention to the reference dates for Malaysia’s business cycle, which have been included in the report for the first time. I can’t say enough how important this little nugget is, because it gives researchers and econometricians looking at Malaysia a single point of reference when looking at growth and recession periods, much like the NBER Business Cycle Dating Committee does for the US (note: the term recession here has a different meaning from what it’s usually taken to mean).
You can find the dates at the end of the full report (warning: pdf link), along with information on the construction of the new indices, which are interesting in and of themselves. The fact that seasonal adjustment and HP filters were used (hopefully with the correct cycle parameter), shows DOS are getting confident in their use of best practices. I would have also wished that some of the component indices were also published, like the Retail Sales Index and especially Manufacturing Capacity Utilisation, but beggars can’t be choosers.
Technical Notes:
January 2011 Economic Indicators Report from the Department of Statistics
I haven’t time to really look at it (run off my feet the past few days), but Bank Negara Malaysia issued their 2010 Annual Report as well as the Financial Stability and Payment Systems Report yesterday (links at the end of this post). I’d get the briefing slides as well, as they usually contain a bit more info.
There’s my weekend reading all sewn up!
Technical Notes:
Via Wired Magazine comes this paper with a unique take on market behaviour (abstract):
Predicting economic market crises using measures of collective panic
Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-YamPredicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.
The modelling approach used here takes cues from physics as well as behavioural economics, blending the two. I’ll admit I’m a neophyte at both – I’m completely unfamiliar with the approach used in this paper. But the premise, and the results are intriguing, despite the brevity of the paper (17 pages, including references).
Technical Notes:
Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam, "Predicting economic market crises using measures of collective panic", Feb 2011
I thought the January unemployment rate was likely to rise, as temporary jobs during the year end sales lapsed. Well, I was kinda right:
Probably long overdue:
Bank Negara Malaysia wishes to announce new measures on credit cards in continuous efforts to inculcate sound financial and debt management among credit card users. These measures are also aimed to promote fair and responsible business practices by credit card issuers with further enhancements in the cards security infrastructure.
But I do wonder whether this might be shutting the stable door after the horse has bolted. Or maybe I’m getting my metaphors mixed. In any case, what’s clear to me is that you’re not going to teach adults how to manage their financial affairs by just putting in rules and regulations on credit. What I think is really needed is putting financial literacy on par with language, math and science skills right at the point where it would be most effective – when budding citizens are in school.
After watching the ongoing drama and tragedy in Japan this past week, it’s hard to focus on purely local concerns. It’s fairly obvious there’s been an enormous amount of damage to the country and the human toll is likely to be horrific. There’s also going to be a lot of repercussions around the region, not least with respect to disaster recovery and the future of nuclear energy.
But the Japanese are a resilient and industrious people, and I’m confident they’ll overcome this crisis, as they have many another in the past. Japan in the post-Meiji restoration era is a case in point: making the transformation from an isolationist, largely agrarian economy into a full-fledged industrial world power in under two generations is an incredible national achievement.
Which provides me a sideways segue into today’s topic – entrepreneurship. We’ve got a lot of programs here in Malaysia to help entrepreneurs, from financial to marketing to educational assistance. There’s no shortage of government programs or money being thrown at developing entrepreneurs – yet we’re hardly known as a hotbed of entrepreneurial activity. So the question is: what’s holding back entrepreneurial development in Malaysia?
In a move that took nobody by surprise, the Monetary Policy Committee opted to keep the Official Policy Rate at 2.75% (excerpt; emphasis added):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 2.75 percent...
...Global inflation is increasing primarily due to the rising energy and commodity prices. For several countries, this has been exacerbated by domestic demand conditions which have prompted policy responses. Meanwhile, most emerging economies, particularly in Asia, continue to be affected by significant shifts in global liquidity, which have increased the risks to macroeconomic and financial stability.
In the domestic economy, latest available indicators suggest continued expansion in private consumption and sustained business spending activity amid more modest growth in external demand. Going forward, economic growth is expected to be moderate in the earlier part of the year and to improve during the course of the year, driven by strong expansion in domestic demand...
...Domestic headline inflation has increased to 2.4% in January 2011. Driven primarily by the significant increases in global commodity and energy prices, domestic prices are expected to continue to rise. There are, however, some incipient signs that domestic demand factors could result in possible upward pressure on prices in the latter part of the year in line with the sustained expansion in economic activity.
Moving forward, while the stance of monetary policy is expected to remain supportive of growth, the degree of monetary accommodation may be reviewed given the sustained growth in the economy and risks to inflation. This is to ensure the sustainability of the growth prospects of the Malaysian economy.
From the Malaysian Insider:
100pc financing is not the solution — Haslinah Yacob
MARCH 10 — Prime Minister Datuk Seri Najib Razak’s announcement that he plans to launch the “My First Housing Scheme (SRP)” to enable young adults earning under RM3,000 to buy a house is well-intentioned but ill-advised.
Malaysia is indeed facing a housing crisis. The property development sector is booming. Unfortunately, property prices are so high, suitable homes are out of reach of most Malaysians. And yes, those most affected are young people looking to invest in their first home.
However, offering young adults the opportunity to “buy” a house without downpayment is not the solution...
Read the rest for her analysis, it's quite good. About the only thing I disagree with is that property development is booming - judging from the latest sales data, it's actually crashing:
Property developers have priced themselves out of the mass market. Other than that, I pretty much share the same reservations. While I don't think we've got the ingredients for a systemic crisis stemming from a housing bubble, the seeds are there – let’s not nurture them into something that’s too big too handle.
Having a roof over your head is a basic human right – but owning it isn’t a necessity, especially if there are alternative, more liquid investments around with comparative yield and less risk.
You might want to read Sakmongkol AK47's rant while you're at it.
I wasn’t expecting all that much from the January numbers – coinciding as it does with the beginning of the year and running up to CNY isn’t exactly a good combination for higher output.
Be that as it may, there’s some positive takeaway from the January figures (log annual and monthly changes; seasonally adjusted; 2000=100):
Not many of my peers are expecting an increase in the Official Policy Rate (OPR) coming from tomorrow’s Monetary Policy Committee meeting at Bank Negara, and frankly neither am I:
Economists expect Bank Negara to hold key interest rate steady
PETALING JAYA: With the slower pace of economic growth this year compared with 2010, economists do not anticipate any interest rate hike in Bank Negara's monetary policy committee meeting on Friday.
However, they believe that there is a 50:50 chance that there could be a 1% hike in the statutory reserve requirement (SRR).
MIDF Research chief economist Anthony Dass said Bank Negara was likely to hold the overnight policy rate (OPR) at 2.75% for the time being, deeming it too early to be raised.
“We think it's too early to raise interest rates. However, Bank Negara may look at other administrative measures to maintain inflation, such as raising the SRR,” he told StarBiz yesterday. “There is a 50:50 chance of that going up, perhaps by 1% (to 2%).”
But I think on balance the odds are rising that there will be a 25bp hike at the next meeting or two – I consider an increase in the SRR as a given.
From today’s The Star (excerpt):
Malaysia's household debt on the rise...But mortgage NPLs at an all-time low
PETALING JAYA: Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009, and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, said CIMB Research.
The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.
The rapid growth of household borrowings is causing some worries that the excessive leveraging by households may make the economy and financial sector more vulnerable to instability and crisis...
While there have been alternatives proposed (see for instance this post), large scale structural and stochastic models are still the bread and butter of macropolicy. Yet the inability of virtually every statistical model to provide substantive guidance on policy issues remains a problem.
This article on VoxEU provides an insight as to why (excerpt; emphasis added):
Dynamic stochastic general equilibrium models and their forecasts
Rochelle M Edge & Refet S. GürkaynakDynamic stochastic general equilibrium (DSGE) models represent a major strand of the modern macroeconomics literature and are an important tool for policy analysis at central banks...
...The success of the DSGE model-based forecasts relative to other methods was viewed as evidence in favour of DSGE models’ reliably capturing the dynamics in the data…
...To see the absolute forecasting ability of the DSGE model, we run a series of standard forecast efficiency tests, where the realised inflation is regressed on forecasts made at different times in the past. A good forecast should have a zero intercept and unit slope as well as a high R-squared. Table 1 shows the efficiency tests for DSGE model forecasts of inflation at different maturities and demonstrates clearly that the forecasts are very poor. R-squareds at all horizons are essentially zero, implying no forecasting ability. All Figure 1 is therefore telling us is that all other forecasting methods perform just as poorly....
December’s outsized trade numbers didn’t looked sustainable, as yesterday’s trade report proved:
Ooooh, this one’s a doozy. I know quite a few people who will blow a gasket (make that: the whole engine block) reading this (excerpt):
Deflation, debt, and economic stimulus
Richard WoodThe US, Japan, and Ireland are suffering from deficient private demand, rising debt, and a tendency to deflation. This column is asks what can be done about it.
We begin by assuming that relevant authorities have decided that new money creation is necessary to work against deflationary tendencies and to stimulate the economy. The central issue explored here then is how should such new money creation best be deployed to create the required economic stimulus?
I haven’t covered the ETP projects much if at all on this blog, mainly because they’re for the most part private sector investment projects with little individual economic impact however large they might be in aggregate.
But this quote from Datuk Sri Idris Jala at the PwC Global Survey Dialogue yesterday caught my eye (excerpt):
At PwC CEO Dialogue: Idris’s Take on Talent
…According to Idris, the Malaysian employment hierarchy currently suffers from a ‘broken pyramid’ situation, where we have huge numbers of people with graduate and postgraduate qualifications, and not have enough people with technical and vocational skills. Idris suggested the solution of the corporate sector coming in to set up technical colleges since the corporate sector themselves know what is needed. In his words,
“I am sitting here on behalf of the government, putting the challenge back to you CEOs here today, to unleash the talent in your workplace. You must put them in the right places and let them grow.”
This past couple of years has been a fascinating laboratory for assessing the effectiveness of alternative strategies of monetary policy. In the wake of the collapse of the Bretton Woods arrangements in the early 1970s, we’ve seen the rise and fall of monetarism (money base targeting), and the spreading hegemony of interest rate targeting (IRT), which involves using an intermediate target – typically overnight interbank rates – to influence price stability and the level of economic activity.
With the latter, successful as it has been, you can immediately see one glaring problem: you’re using one instrument (the short term interest rate) to try and target two variables which often move at odds with each other. Aim for higher growth and you’re ipso facto accepting potentially higher price increases i.e. inflation, and reaching for price stability (and especially absolute price stability) will sacrifice economic growth. There’s also the fact that you’re depending on a stable transmission mechanism between short term nominal interest rates to longer term real interest rates, which are the ones that actually matter for credit creation, consumption and investment.
Money supply growth was fairly steady over the course of the last half of 2010, but as we get into the Year of the Rabbit, things have changed (log annual and monthly changes; seasonally adjusted):
Seasonally adjusted M1 rose RM9.9 billion (RM 15.6 billion unadjusted) mainly from higher demand deposits and an unseasonally high cash injection. M2 growth accelerated as well from much the same factors, with the rest of the components rising marginally or not at all.
I’ve been sold on the idea of a “demographic dividend” for well over a year now, and here’s some more evidence from a new IMF paper (abstract):
The Demographic Dividend: Evidence from the Indian States
Aiyar, Shekhar & Ashoka ModyLarge cohorts of young adults are poised to add to the working-age population of developing economies. Despite much interest in the consequent growth dividend, the size and circumstances of the potential gains remain under-explored. This study makes progress by focusing on India, which will be the largest individual contributor to the global demographic transition ahead. It exploits the variation in the age structure of the population across Indian states to identify the demographic dividend. The main finding is that there is a large and significant growth impact of both the level and growth rate of the working age ratio. This result is robust to a variety of empirical strategies, including a correction for inter-state migration. The results imply that a substantial fraction of the growth acceleration that India has experienced since the 1980s - sometimes ascribed exclusively to economic reforms - is attributable to changes in the country’s age structure. Moreover, the demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades. With the future expansion of the working age ratio concentrated in some of India’s poorest states, income convergence may well speed up, a theme likely to recur on the global stage.
I was going to write about this issue yesterday but didn’t have time. Now William Pesek makes the same point (excerpt):
Inflation Above 9% Shows Bankers No Longer Gods
William PesekMarch 1 (Bloomberg) -- Duvvuri Subbarao knows a thing or two about inflation. India’s central-bank head defeated price gains exceeding 10 percent twice in the past two years alone.
Now, Subbarao is back at battle stations as a chorus of traders say he’s behind the curve. It’s hard to argue with the wisdom of markets with Indian inflation back above 9 percent, the highest among Asia’s 10-biggest economies.
Yet the Reserve Bank of India is the vanguard of a worrisome phenomenon in the world’s most vibrant economic region. Central banks are in over their heads and need help from politicians. Higher interest rates alone won’t cut it.
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