Tuesday, February 11, 2014

4Q2013 Construction and Distributive Trade

The prevailing narrative I see in the media these days – both mainstream and online – is that the economy is in trouble, and we’re doomed unless the government does something (alternatively: we’re doomed unless we change the government).

I don’t know; the numbers are painting an entirely different picture. The angst is partly a function of price increases, which have squeezed wallets across the country. It’s also I suppose a function of which sector you’re working in and whether labour is sharing in the money coming in.

DOS I think has been working overtime – one of the items on my wish list of statistics we have for Malaysia is retail sales. Voila, it’s now here (warning: pdf link), along with data for wholesale and motor vehicle sales (index data is available here). Just as important, we’ve now got aggregate wage data for all three subsectors, important for tracking worker compensation, which AFAIK is also the first time this has been added to the distributive trade report.

Released at the same time is data for the construction sector, with sadly the wage data still missing. Nevertheless, I’m sure that’s on the way (fingers crossed). I haven’t had the chance to really tabulate the data yet – hence no charts – but the numbers indicate a fairly healthy economy:

  1. Retail sales rose a blistering 10.5% on the year;
  2. Wholesale trade rose 6.9%
  3. Construction output (already high) grew 11.3%

Only motor vehicle sales could be considered disappointing, growing just 4.0%, though that could be blamed on the price shock from the 20 sen petrol price increase, which came in September.

Here’s the interesting bit – wage growth in distributive trade looks pretty healthy. Average wage growth in 2012 hit 7.1%, and 6.0% in 2013. That well exceeds sales per worker of 4.2% (2012) and 3.7% (2013). Data on manufacturing sales and wages shows the same characteristic – not only is average income growth exceeding sales growth (i.e. labour income is increasing faster than labour productivity), but its also exceeding the overall rate of inflation.

So where does this meme that income growth in Malaysia is stagnant and the economy is in trouble comes from? I could blame inequality, but disaggregated household income data suggests otherwise – income growth has been across the board. It’s also possible that inflation in specific urban areas like KL and Penang generally exceed overall urban inflation, but that’s hard to substantiate without the data. And rabble-rousing by the opposition, as suggested by some, sounds ridiculous to my ears – the angst is too widespread. Then there’s of course the suspicion that DOS is fiddling the figures, but that sounds even more ridiculous – if it was true, we’d never see prices increase, or output drop, at all.

Whatever the case, the economy is keeps chugging along.

Technical Notes:

  1. 4Q2013 Construction Sector performance
  2. 4Q2013 Distributive Trade Sector performance
  3. 4Q2013 Index of Distributive Trade report


  1. Doomed, MR going to hit 4 to a USD. Hishamh, your view please on the possibility of ringgit hitting 4 to a USD, what are the factors that could bring it about.

    Thank you.

    Zuo De

    1. @Zuo De

      A hard landing in China, which is a possibility. Problem is that exchange rates are relative prices, not absolute ones, so figuring out future levels is like rubbing your tummy while patting your head (or is it the other way around)?

    2. Well, if a currency reflects a country's fundamentals, that may explain why the ringgit is "weak" against, say, the Singapore dollar.

      Analysts in Singapore say that this indicates a growing recognition of Singapore's triple-A ratings and "safe haven" status.

      Being mischievous, I'd say that this may indicate that Malaysia is not a "safe haven", with whatever that implies!

      So we can, with equanimity, contemplate a scenario where 1 Sing dollar could be worth 3 ringgit or more.

      Is that doomsday for the Malaysian economy? No, it isn't, unless the Malaysian government throws caution and prudence to the wind and goes stark raving spendthrift with subsidies, bail outs and cash handouts.

      It COULD happen, if populism takes permanent root here, but I'd like to think that the top brass at BNM and the Treasury are made of sterner stuff.

    3. @Arimnestos

      I'm not sure where you're heading with this.

      Singapore uses the exchange rate as its primary monetary policy instrument, which by implication means that the SGD doesn't follow fundamentals at all.

      It also means an appreciation against any of the currencies of Singapore's trade partners is almost guaranteed. At the present rate of appreciation, MYRSGD should hit 3.00 on or about 2022/2023, and 4.00 by 2042/2043.

      Also, Malaysia is partly dependent on commodity based exports. The exchange rate of the Ringgit will therefore rise or fall depending on global commodity prices, independently of anything else. Try regressing oil prices or a commodity index against the MYRUSD - it's illuminating.

    4. Maybe, but what do you mean by "fundamentals"?

      To echo your comment, I am also not sure where you are heading with this!

      Being of a simplistic mindset and all, I'd view a budget surplus, current account surplus, large international reserves and triple-A credit ratings as must-have "fundamentals".

      Like I posted in another thread, the MAS maintains a policy of "gradually" appreciating the Sing dollar against a basket of currencies of the republic's main trading partners. Which, going by the trade stats, would include the US, EU, China and Malaysia.

      MAS also uses an appreciating Sing dollar to combat imported inflation. Which is commonsense, as Singapore has no natural resources. On the other hand, it has to make sure that a strengthening Sing dollar doesn't make exports uncompetitive.

      It's a fine balancing act, but thus far the MAS seems to be pulling it off.

      But that raises the question of why people want to park their funds in Singapore and hold Sing dollar-denominated assets.

      There's a basic question of "confidence" and "trust", isn't there?

      Which may be anathema to professional economists, but none the less real!

    5. @Arimnestos

      From my perspective, saying that the SGD reflects fundamentals is a lot like saying that US interest rates reflects fundamentals. In other words, the assertion is manifestly false.

      By construction, the use of any variable as a control instrument in monetary policy means that variable will no longer reflect market conditions; instead the intention is to set market conditions.

      BTW, economic fundamentals that have empirical and theoretical backing in determining exchange rates are:

      1. Relative price levels - all other things being equal, the higher the price level, the stronger the exchange rate i.e. the higher cost economy will have a stronger currency

      2, Government consumption - all other things equal, higher government consumption leads to a stronger exchange rate

      3. Productivity - a country with a higher productivity level in the tradeable sector will tend to have a stronger currency

      4. Terms of trade - a dual effect variable; higher terms of trade increases income (and raises the exchange rate) but also leads to substitution. Nevertheless, empirically, the income effect predominates. The Ringgit tends to be highly sensitive to terms of trade

      5. Net foreign assets - another dual effect variable, which can both lower or increase the exchange rate. A higher stock of NFA can lead to higher income flows (+ve), but a lower stock from high capital inflows could also be positive. Empirically, the former is important for advanced and less developed economies, while the latter tends to be characteristic of developing economies

      Of the list you mention, the only one that has any real standing is reserves, which is a stock variable and part of NFA. The others are all flow variables - they can affect exchange rate dynamics, but play no role in determining levels. A current account surplus for instance just causes changes in the NFA.

      As for your other points:

      "It's a fine balancing act, but thus far the MAS seems to be pulling it off."

      I'd suggest checking Singapore's CPI numbers for the last few years. I think a lot of Singaporeans might disagree with you.

      "But that raises the question of why people want to park their funds in Singapore and hold Sing dollar-denominated assets."

      It's called network externalities or clustering. Having built up a presence as a regional financial centre over the last couple hundred years, and providing the necessary institutional and infrastructure support to maintain it, finance and financial institutions will naturally gravitate there.

      In very simple terms, people put their money there because other people put their money there.

      It's the same phenomenon behind the historical development of cities and industrial clusters like Silicon Valley.

    6. This sound like a chicken an egg question. I will take it there is no right neither no wrong from either of you.

      In another word, both explanation is acceptable.

    7. No definite answers. Time will prove it, either explanation or excuse.

    8. @Hisham

      Higher price levels leading to stronger currency is rather interesting in light of Numbeo's Cost of Living comparison between KL and Singapore.


      Consumer Prices in Singapore are 96.36% higher than in Kuala Lumpur
      Consumer Prices Including Rent in Singapore are 168.56% higher than in Kuala Lumpur
      Rent Prices in Singapore are 345.55% higher than in Kuala Lumpur
      Restaurant Prices in Singapore are 121.58% higher than in Kuala Lumpur
      Groceries Prices in Singapore are 72.75% higher than in Kuala Lumpur
      Local Purchasing Power in Singapore is 12.14% lower than in Kuala Lumpur

  2. Dear Sir,

    your forecast does not align well with the 2014 forecast by Malaysia Institute of Economic Research:

    Can we conclude that MIER is less clever than you ?

    Appreciate your reply

    Thank you

    1. @anon

      I don't think this is a case of who's cleverer.

      That's an awfully written analysis, compounded by mistakes in characterising actual policy and policy trade-offs. The stuff on the Ringgit is almost totally wrong (BNM is committed to a floating exchange rate - the current undervaluation is entirely market driven, not policy driven). Recommending fiscal and monetary tightening at the same time (given the projected outlook of slower growth), is insane. Nor do I see any evidence that inflation expectations are increasing - core inflation spiked with the the increase in taxes and duties (e.g. on alcohol), but is now back within its previous range.

      To be fair, MIER has had some trouble lately, with both funding and personnel.

  3. Thank you for the forecast report, well discussed here.