REALIGNING THE ECONOMY: RECENT MACRO TRENDS

The Malaysian economy did witness a burst in growth (6.4 per cent) in the last quarter of last year, leading to an overall growth rate of 5.6 per cent for the year 2012, prompted more by short-terms phenomenon. Worried about its long-tem implication, some disturbing trends are now vividly appearing, which are certainly not immediately dangerous, but surely worthy of attention. There are four emerging trends to be discussed below. First, imports have been growing at a faster rate than exports since the beginning of 2012. While the trade balance still in surplus it has been sliding over the last year. For a country such as Malaysia, which is export-oriented, it would be desiarable and the economy would be more sustainable to expect exports to be increasing more rapidly than imports. It will be unsustainable if the trend continue over a long period of time. The trend however is not entirely bad because the rapid increase in imports was observed in the capital and intermediate goods category. A positive account of this trend could be to point to the need for more capital and intermediate goods to replinish old stock and to build new ones as the economy is entering into global recovery cycle and gearing towards more sophisticated and capital-intensive methods of production. Similarly, it will be unsustainable if the trend in import occurs in the consumer goods category instead, in which no value-added will be created as the expenditure is more towards satisfying consumer demand. Second, public consumption expenditure touched an enviable year-on-year growth rate of 10 per cent in 2012. This brings us to the question of the sustainability of public sector account. It is an issue that has been repeatedly discussed publically. Without going into the somewhat questionable fiscal policy approach that has been chosen, it may suffice to add that it is best to use high government spending with degree of discrimination, for instance, when the external environment is unfavourable. The trends that have been observed in the previous years indicate areas of concern, issues that have to be deliberated upon, and for which appropriate policy measures have to be devised. Fiscal policy is prominent among the problems that have to be grappled with. The government has mentioned that it would like to balance the books and keep fiscal deficits under control. The pressures that come with an election year may have exerted some pressure in deviating from its well-meaning policy intentions. But the need to return to sound economic principles cannot be over-emphasised. The question of fiscal reform has been put on the shelf, or so it seems. There must be a return to the issue of fiscal reform; it must be phased; and it cannot be in a year when externally induced challenges are overwhelming and the economy takes a dip in growth. The above respective external and internal macro-economic expenditures considered together bring us to the third emerging trend, the issue of rebalancing the economy. Although it has been widely reported that Malaysia is shifting to a domestic-demand-led growth, the distinct growth rates for the macro-components of domestic demand is a cause of concern. The growth rate in 2012 was far higher for public consumption (10 per cent) and gross investment (12 per cent) than for private consumption (6 per cent). There are two points for debate here. It must be decided, and for good reason, whether it is necessary to switch to a domestic-demand driven economy for a small economy like Malaysia. No less important is the mechanism for accomplishing this objective. As it stands, exports are not vibrant enough and weak exports cannot be sufficiently compensated for by a dynamic takeoff in domestic demand. Turning to the supply-side economics, the fourth emerging trend that gives us some cause for concern is the macro-economic performance of the broad economic sectors. It is the services sector that has propelled the growth of the economy. This is hardly new or surprising because the services sector has been driving growth by about seven per cent since 2010. It would have been desirable to have seen growth driven by the manufacturing sector

as well. The manufacturing sector registered a year-on-year growth of 11 per cent in 2010 only to crash to 4.8 per cent in 2012. The slack from the manufacturing sector seems to have been taken up by the construction sector, therein in 2012 the sector grew at 18.5 per cent, in stark contrast to an annual growth of 4.6 per cent in 2011, and six per cent in 2010. It would be preferable to see greater growth in the services and manufacturing sectors, rather than in construction as the former takes substantially bigger share of the GDP than the later. This is where the hitch lies. In a sense, the massive economic transformation programmes that the government has embarked on have resulted in the sparkling growth exhibited by the construction sector in 2012. But that is hardly sustainable, not one of the projects that can be repeated year in and year out. The year 2012 recorded a slowing down in the manufacturing sector, in terms of its year-on-year growth. If this phenomenon is part of the rebalancing that is being spoken of, it is not at all a good sign. Structural shift in the economy that we are hoping for should not discriminate against manufacturing as we have not reach fully matured manufacturing sector. There are still plenty of rooms for high value-added activities in maufacturing to be reaped. It would be satisfying to note a shift towards a technology-intensive, high-productivity manufacturing sector. It is not encouraging when the year-on-year growth of the manufacturing sector is indifferent. Yet another important question that has to be swiftly addressed is the growth in FDI. Malaysia has in previous years witnessed a higher pace of growth in FDI than it did last year. Although there is an encouraging inflow of FDI recently it is not increasing fast enough as it should. The state of foreign direct investments (FDI) gives little reason for jubilation. Tracing FDI trends over the previous year (i.e. 2012), it is observed that FDI as a percentage of GDP contracted by about five per cent in the first quarter. In the second and third quarters, the same statistic hovered around an unexciting one per cent or so. And in the fourth quarter, it declined to a worrisome negative nine per cent. Portfolio funds saw much volatility in 2012. Portfolio investments as a percentage of GDP was wildly positive in the first qaurter (about 12 per cent), only to shrink into negative territory the following quarter. In the third quarter it rallied up to 14.5 per cent. Portfolio investment gave the boost to push-up whatever shortcoming there was on the FDI side of investments. This, surely, must be a disconcerting feature for policy makers. Growth in 2012 has been excellent, with the growth in the fourth quarter being nothing less than astounding. But that is not ground for complacency. As the review of some macroeconomic trends in 2012 indicates, there are areas in the economy that should be re-visited. A variety of solutions is possible. But it would not be prudent to ignore the underlying problems.