4Q 2021 GDP: The Good, The Bad, and The Ugly

It's taken me this long to really delve into last week's GDP report, largely because I wanted to try something different (results forthcoming). But before getting into that, the headline numbers themselves are mostly encouraging (log annual and quarterly SAAR changes):

3Q 2015 GDP: Flip A Coin

Last week’s GDP report was a mixed bag. On the one hand it paints a picture of an economy slowing down, especially in terms of domestic demand. On the other hand, some of the indicators appear to have bottomed out.

The headline numbers aren’t appealing (log annual and SAAR quarterly changes; 2010=100):

March 2015 Industrial Production

Well, well, well (log annual and monthly changes; 2010:100):

4Q2014 National Accounts: Smokin’ Hot

From last week’s 4Q2014 GDP report, it looks like the IPI was more than just a harbinger, it was spot on (log annual and quarterly SAAR changes; 2005=100):

2Q2014 GDP: Into Orbit

My, oh my, how things have changed (log annual and quarterly SAAR changes; 2005=100):

We ain’t talkin’ bout no base effect no more. T’ain’t bout prices neither. At 6.4% in percentage terms, the economy has put up a pretty solid growth number. If the low level of output in 1Q2013 influenced growth this year, that’s less of a consideration for 2Q2014. And if export and commodity prices trended up in 1Q2014, they’ve been flat or trending down in 2Q2014 (log annual and quarterly SAAR changes; 2005=100):

1Q2014 National Accounts

A little stronger than I thought it would turn out to be, but not too much so (log annual and quarterly saar changes; 2005 prices):

Don’t go overboard though – the quarterly growth numbers tell the real tale. 1Q2013 was a really horrible quarter, which means growth for 1Q2014 will flatter to deceive. Note that 1Q growth was stronger in 2011 and 2012, but weaker in the last couple of years (including this past quarter).

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.

2Q2013 National Accounts

Yesterday’s GDP release showed the Malaysian economy continuing to expand, but well below expectations (log annual changes, 2005=100):

1Q 2013 National Accounts: Braking Hard

Growth in the last quarter of 2012 was shockingly fast. But for every action, etc. etc. Growth in 1Q2013 was shocking too, but in the opposite direction (log annual changes; log quarterly changes, SAAR):

The annual growth number fell from a revised 6.5% in 4Q2012 to 4.1% in 1Q2013 (4.0% in log terms). This was actually a little lower than forecast by my IPI based model – for once, it wasn’t being overly pessimistic – but is still respectable growth, and not bad compared to our regional peers.

2Q 2012 National Accounts: Surprise, Surprise

What a nice lead up to the holidays. While I thought 2Q GDP might turn out to be pretty good, 5.4% annual growth is outside all my expectations (log annual and seasonally adjusted annualised quarterly changes; 2005=100)

Seasonally adjusted quarterly growth has been pretty solid too at 5.9%, holding up above 5.7% for three straight quarters.

2Q 2011 GDP: Better Than Expected

While disappointing, the results weren’t totally unexpected. In fact, the y-o-y number of 4.0% came in somewhat higher than the consensus estimate of around 3.6% (and well above that implied by net trade or industrial production output).

In point of fact, apart from the external side, the numbers don’t look half bad (log quarterly changes; seasonally adjusted; annualised):

4Q 2010 GDP: Bigger Bounce Than Expected

You’ll hear and read tomorrow that economic growth moderated further in 4Q 2010, reaching 4.8% after 3Q’s 5.3%. And so it appears from a year-on-year basis (log annual changes):

Trade growth dropped into low single digit territory, while public consumption was flat. Impetus for growth came from private consumption and investment – both welcome news, as the transformation of the economy to high income status requires just that. Full year growth reached 7.2%, quite a bit better than my forecast and the consensus estimate of 7.0%.

3Q 2010 GDP: Disappointing

So much for optimism. Yesterday’s report from DOS had 3Q real GDP (RM141.9b) right on the number predicted by the IPI (RM141.8b), which means the economy actually shrank. Not as bad as Singapore’s, but still…

The growth numbers weren’t quite as bad as I forecasted (though still way below the consensus estimate of 5.7%) with the GDP up 5.3% on the year and –2.6% on the quarter, but that’s because of something negative not positive, as 2Q 2010 real GDP was also revised downwards by RM30 million.

So, what happened? Softening external demand is of course part of the story, but believe it or not, on the demand side the second biggest marginal contributor to the drop in GDP is…public spending!

Warisan Merdeka, KLFID, And The Demand For Office Space In Kuala Lumpur

Although announced as part of the government’s 2011 budget proposals, neither the RM5 billion Warisan Merdeka (to be developed by Permodalan Nasional Berhad) nor the RM26 billion Kuala Lumpur International Financial District (to be jointly developed by 1Malaysia Development Berhad and Abu Dhabi’s Mubadala Group) are strictly speaking government projects, although the latter skirts a very fine line on that issue.

There’s a lot of opposition to both projects, but funnily enough, it’s Warisan Merdeka that has attracted the most vitriol despite being less in scope and risk, and despite PNB not being directly owned by the government. I guess its the inclusion of a 100 story office tower that has raised people’s hackles, and the prospect of a 5-10 year development in one of the worst traffic areas of the city.

But the real issue here is the viability and feasibility of both projects – will there be enough demand to absorb the inclusion of so much additional office and commercial space?

2Q 2010 GDP: Have We Peaked?

What a change a quarter makes – from the optimism from when the first quarter numbers came out, to a much more sober assessment of our chances going forward.

On the plus side, my little forecasting exercise last week didn't do me much wrong. Today's 2nd quarter GDP report from DOS showed real output hit RM138.5 billion, a little under my IPI-based forecast of RM139.1 billion. Growth numbers are a little further off though at 8.9% (actual) against 9.4% (forecast), but that's not too bad compared to the consensus forecast of 8.4%.

Where’s the growth coming from? Seemingly from all sources (log annual changes; seasonally adjusted; 2000=100):

1Q 2010 GDP: Solid Growth, But Momentum Is Slowing

Yesterday’s GDP numbers included some revisions to previous data that changes the growth numbers somewhat, but doesn’t change the fact that the economy posted some pretty good numbers for 1Q 2010, beating the consensus estimate by 0.7% to reach 10.1% for real GDP growth (log annual changes; 2000=100):

While growth was across the board, the real driver was a strong upswing in trade over last year’s numbers. The rest of the components posted less than impressive growth numbers.

The supply side showed equally solid growth across sectors except for mining, with manufacturing leading the way (log annual changes; 2000=100):

I think these solid numbers prompted BNM to continue with their “normalisation” of interest rates, though it’s interesting that the market is talking about “better than expected” whereas BNM is saying “recovery is well entrenched”. That’s a nuanced view of things, and if you look at quarter on quarter growth, you’ll see why – although we still see growth, the magnitudes are less than comforting.

On the demand side, trade is still driving GDP up, but growth is well down from 4Q 2009 (log quarterly changes, seasonally adjusted and annualised; 2000=100):

Note that investment is nearly 10% down from the last quarter, and trade volume is falling. Private consumption is still weak (+4.4%), although there is some minor support from government spending (+8.4%).

On the supply side, it’s agriculture that’s showing negative growth (-3.0%) while mining in contrast has zoomed up (19.8%). Manufacturing growth has slowed though still high at 14.9%, but the construction (+3.2%) and services (+1.3%) sectors are almost flat (log quarterly changes, seasonally adjusted and annualised; 2000=100):

Under these circumstances, I’ve always found it useful to look at the levels, rather than growth numbers. There’s always a risk of a distorted picture using growth metrics alone when an economy is going into or coming out of a recession. The contrasting scenarios shown by the different growth measurement methodologies certainly suggest looking beyond mere growth numbers (real GDP; 2000=100):

On the demand side, it’s clear that trade caused the recession, and trade has largely brought the economy back. The levels are still below 2008 peaks however, and investment is lagging the other components. Private consumption is a little weaker than it should be, though it looks like its more or less back to its long term growth path.

On the supply side, manufacturing took the brunt of the recession (mining looks bad, but the numbers are approximately level). I’d discount the contribution of the construction sector because it’s so small, while agriculture and services are substantially unmoved off their long term growth paths.

For the rest of the year, the prognosis for growth depends really on whether there is a full recovery in trade and investment. I think that’s likely as the US economy is strengthening and Europe and Japan have bottomed out. The risk factor is primarily in my view a pullback in growth in China, which I think is unlikely over the near term – of course, I’m no China expert so take that with a bucket of salt.

But to return to the issue of “normalisation” of the OPR, from the look of things, there’s still a substantial positive output gap i.e. the difference between actual and potential output of the economy. That in turn suggests that there’s not much foundation for a structural rise in inflation, which in turn argues for a more moderate approach to increasing interest rates.

I’m not keen on the “asset price bubble” story, as I see little evidence that cheap domestic money is playing a role in driving up asset prices locally. It’s hot money from outside the country that is propping up the bond market and causing the Ringgit to rise, and an interest rate hike (while penalising existing bond holders), will attract further foreign portfolio interest.

Time for capital controls? Maybe, especially as the thinking on capital controls have turned 180 degrees in the last ten years.

Technical Notes:

1st quarter 2010 GDP report from the Department of Statistics

A Tale of Two (Spin) Cities: 4Q2009 GDP

The GDP numbers look pretty good don”t they? Real GDP growth hit 4.6%, which by Malaysia’s standards means we’re officially out of recession. This hit right in the middle of the upper half of my forecast range. Rather than comment directly on the numbers, I’m going to try a little experiment and show what happens when you change the basis of calculating growth.

If you recall, for this purpose Malaysia uses quarter on the same quarter last year. Most other countries use this methodology, but very few use it as their reported growth number (with the notable exception of China). To illustrate, such a calculation would look like this:

GDP growth=GDP(4q09)/GDP(4q08)-1

The internationally accepted standard on the other hand is to use quarter on the previous quarter, using seasonally adjusted data, with growth number later annualised:

GDP growth=((GDP(4q09)/GDP(3q09))^4)-1

As an alternative, you can equivalently use a natural log formulation:

GDP growth=(1+(LN(GDP(4q09)-LN(GDP(3q09))))^4)-1

…which is a little easier computationally, as well as being level neutral.

So, here we go…

Case 1: Malaysian standard
After three straight quarters of contraction, Malaysia’s 4Q09 GDP growth numbers confirmed that the country was out of recession, posting a growth of 4.5% against the same quarter last year:



On the demand side, growth was driven by a strong recovery in trade and an 8.2% jump in domestic investment. On the supply side, growth was largely broad based and supported by fiscal stimulus measures which helped drive construction growth to 9.2%, while the manufacturing sector posted its first positive growth in four quarters. The only sector yet to recover is mining, albeit the fall in output improved to –2.8%:



Case 2:International standard
Malaysia’s 4Q09 GDP growth zoomed an impressive 14.2% despite a sharp pullback in government spending, which fell 11.1%:



Output has now recovered to the level prior to the recession, which began in 2Q08 and lasted four consecutive quarters, to 1Q09. On the demand side, growth was driven by a 28.2% jump in exports and a 21.3% increase in domestic investment.

On the supply side, growth was uneven, with agriculture and manufacturing leading the way. Services growth was sustained, but mining sector output dropped 8.50% while construction output growth fell from 9.1% in 3Q to just 1.9% in 4Q2009.



Summary
A real study in contrasts isn’t it? While the broader picture is similar, the details show significant differences:

1. The timing of the recession changes from beginning in 1Q2009 under the official standard to 2Q2008 under the international standard –a full three quarters earlier.
2. The length of the recession also changes from 3 quarters to 4 quarters.
3. Positive domestic demand growth in 4Q2009 turns negative under the international standard.
4. The biggest differences are in the sector breakdowns, with sharp construction and services growth turning into consolidation, and first manufacturing recovery has actually been evident since 2Q2009.

The billion dollar question is: Would a difference in calculation affect the planning and expectations of economic agents (consumers and businesses), and would it affect the timing and scope of government policy? I don’t necessarily think so.

If you recall, the first stimulus package was introduced in November 2008, which coincided with the GDP report for 3Q2008. At that point, under the international calculation the recession would have already entered its second quarter, but was still relatively shallow. The signs were already there however for the sharp drop in 4Q2008, and the even steeper drop in 1Q2009.

However, fiscal consolidation might have happened earlier with the emergence of the economy out of recession in 2Q2009 – that might not have affected for instance the credit support the government provided which formed the bulk of the 2nd stimulus package, but we might not have had as much of the direct spending that the government committed to (nor the pace of borrowing).

So…which way is better? From a pure macro-perspective, neither is necessarily good or bad. I don’t think there would be any changes in BNM’s policy moves for instance. But from a micro-perspective, the international standard offers a better picture of what’s happening on the ground and which areas need government support (if at all). Ideally, both methods should be reported and used for policy adjustments – as is the general practice elsewhere.

Technical Notes:
4Q2009 GDP report from the Department of Statistics