The debt driven 5.4% GDP growth in Q2 2012

The Q2 2012 Gross Domestic Product growth of 5.4% seems to be a pleasant surprise from 1Malaysia administration.

The Second Finance Minister who is on top of the numbers pointed out the oil rigs are responsible.

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http://biz.thestar.com.my/news/story.asp?file=/2012/8/21/business/11887347&sec=business

Tuesday August 21, 2012

Husni: 5.4% Q2 growth a boost for Malaysia

IPOH: The better-than-expected 5.4% growth in gross domestic product (GDP) in the second quarter is a confidence booster for Malaysia to perform better for the rest of the year.

Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah attributed the current positive growth to the resumption of operations at oil rigs, which had affected the country’s production of crude oil previously.

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 According to Jabatan Statistik Malaysia, however, has more to say:

http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=1699&Itemid=153&lang=en

ECONOMIC GROWTH

The Malaysia's economy strengthened further to 5.4 per cent against 4.9 per cent in the preceding quarter led by continued expansion in the Services and Manufacturing sectors. The robust growth in Gross Fixed Capital Formation (GFCF) has driven the demand side.

The statistic seems to point to services as the catalyst, rather than oil rigs.

Notice also that the Perbelanjaan Penggunaan Akhir Kerajaan growth vs Perbelanjaan Penggunaan AKhir Swasta growth. For 2010, the government’s growth in spending was 2.9% vs private at 6.6% but starting from 2011, the government spending growth exceeded the private sector and morphed onto double digits! Look at Q3 and Q4 2012 at 21.1% and 22.95% respectively.

The increase in Najib administration’s expenditure is getting at very significant pace. When BN administration spend our tax payers' money, the usual stuff like Auditor General's horror stories, contracts awarded without open tender comes to mind.

With regards to services sector, the Jabatan Statistik has this to say:

SERVICES

The Services sector rose to 6.3 per cent supported by Wholesale & Retail Trade and Finance & Insurance. The growth of 5.9 per cent in Wholesale & Retail Trade was led by the Retail segment. In addition, the growth in Motor Vehicles segment accelerated to 8.4 per cent during the quarter (Q1 2012: 0.2 per cent) propelled by the higher sales of motor vehicles.

Finance & Insurance expanded to 6.6 per cent boosted by the higher fee income on banking activities and increase in premium income on insurance activity. Meanwhile, Business Services picked up to 8.8 per cent underpinned by professional services related to engineering activities.

The growth in motor vehicles sales is due to lack of viable public transport, the need to preserve Proton and hence the Malaysian public is burden with overpriced cars that build on hire purchase loans  and interest repayment.

http://www.malaysia-chronicle.com/index.php?option=com_k2&view=item&id=37567:malaysia-where-the-price-of-a-car-is-equivalent-to-the-price-of-a-home&Itemid=2

The banking activities, however, have to be interpreted with the explanation on Construction further below:

CONSTRUCTION

The Construction sector expanded remarkably at 22.2 per cent from 15.5 per cent in the previous quarter. The growth was spearheaded by the robust performance in the Civil Engineering and Residential.

The vibrant performance of Civil Engineering at 39.8 per cent was spurred by major infrastructure projects mainly in Sabah, Melaka, Pulau Pinang and Perak. During the quarter, Residential continued the strong momentum at 20.1 per cent driven by the high-end residential projects in Klang Valley.

So residential housing is the key driver of growth but is this “growth” a quality growth i.e. improving the quality of life of the people? For a minority per yes but for the majority, house prices increase have far outstripped salary/earnings growth. Try asking for a salary increment that matches the house price increase and see what your boss say.

Therefore, while it looks good when economic growth is measured on inflated house prices, the sentiment on the ground is very much different.

Property market in certain parts of Malaysia, notable Klang Valley are subject of speculation.

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http://www.btimes.com.my/articles/20120815000637/Article/

Efforts to curb property speculation

By Zaidi Isham IsmailPublished: 2012/08/15Share  PDF 

 THE government will initiate measures to address various issues gripping the property sector, including curbing rampant speculative activities in the market.

Metro Kajang Holdings Bhd group managing director Datuk Eddy Chen Lok Loi said for example, a house built in Perlis cost RM250,000 but the same house using the very same materials but built in KLCC would cost RM1 million

Meanwhile, National House Buyers Association secretary general Chang Kim Loong said all parties, including the government and developers, need to launch proactive measures to stop steep price increases in the property market due to false demand and excessive speculation fuelled by easy mortgages and low real property gain tax.

"There is a huge mismatch between what the average household income can afford to buy compared to what is available in the market. A homeless generation will emerge and create various social problems," said Chang.

Chang said the average rakyat in a major urban area was struggling to buy his dream home where the average household with income of RM5,962 in 2009 would not be able to qualify for a 90 per cent loan over a 30-year period.

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The crazy property prices mean crushing housing loan debts. And it will also deprive families of having more money to be spent elsewhere, curtailing their purchasing power hence hindering other consumer commercial activities. The crazy house prices have made many Malaysians bearing housing loan debts at beyond reasonable level compared to their earning as well as what their counterparts in other countries as the article below shows:

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http://www.consumer.org.my/index.php/personal-finance/debt/465-household-debt-in-malaysia-is-it-sustainable

Generally a  debt service ratio of 30% is acceptable, i.e. one third of a household income is used to pay off debt (principal and interest). However, the Malaysian household debt service ratio was 9.1% in 2006, rose to  49.0% in 2009 and dropped slightly to 47.8% in 2010. This means that on average almost half of a household’s income goes to repaying debts.  Thus after paying off the debt there is not much left to spend on food, transport, education, and for emergencies. Should the breadwinner fall sick or lose his job, the family will find it hard to make ends meet and loans may be defaulted.

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In fact, the GDP numbers hide the ever increasing debts – national debts which have to be paid by tax payers, housing and personal loans which also have to be paid by tax payers. This is no more than debt fuelled pumped up growth

That is why bankers are having a great day and it shows in their contribution to growth in GDP

1)      High net interest income – low fixed and saving deposits interest pay to responsible citizens who saves their earning s (if possible)  vs high lending rates on housing loans, credit cards and commercial loans

2)      Huge government projects given out sans open tender requiring more bank borrowings

3)      Lack of viable public transport forces Malaysians to purchase their own cars and motorcycle making  consumer loans growth inevitable

http://www.theedgemalaysia.com/in-the-financial-daily/218885-maybank-records-double-digit-growth-in-net-profit.html

While some people might point to the increase of GDP and use it as bragging tool and even to justify for more uncontrolled spending (e.g. RM500 vote buying round 2?), it is worth knowing that our debts obligations are increasing at a much faster rate than the GDP.