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The Not So Hidden Recession

by Harun Rashid

Aug 29, 2001

Malaysia is two thirds into the third quarter. According to the central bank governor and the prime minister, there is no recession. The analysis is somewhat hedged, and hinges on the 'technicality' of the matter.

It is understandable that the prime minister wishes to avoid the stigma which attaches to his operation of the country's economy if there is a genuine, full blown and widely recognised recession. To avoid this, a fudge here, and a fidget there, brings the figures nicely into acceptable denial. Unfortunately, the country is in a recession, a bad one, and the sooner this is recognised and acknowledged, the sooner significant steps can be taken to assuage the damage.

The Malaysian statistical department has a webpage, and on this webpage there is the following statement: "The Malaysian economy slowed down in the second quarter to grow by 0.5 percent year-on-year after a growth of 3.1 percent in the first quarter." This is a strange statement, for several reasons.

If the economy "slowed down," there is a suggestion that it was "faster" in the previous period, specifically the first quarter. If so, then the country is in a recession, according to the definition: two consecutive quarters of decline. There was a decline in the first quarter, and there was the "slowed down" reported for the second quarter. What kind of sleight of hand is this, coming from the central bank governor appointed by the prime minister?

The second part of the statement is equally puzzling. The year-on-year growth is given as a positive 0.5 percent. The amount given as GDP for the second quarter of 2000 is given by the statistics department as RM84.7 billion. The GDP for the second quarter of 2001 is reported to be RM82.6 billion, a decline of RM2.1 billion year-on-year.

Given the ambiguity of the announcement, one wonders if it is possible to determine with accuracy the state of the economy. Looking at the figures for the first quarter (RM 82.1 billion) and then the second quarter, RM 82.6 billion, it appears that indeed there is an increase, thanks to significant government contributions toward hotel and airline reservations for civil servants, EPF contributions for (undelivered) computer purchases, and large mega-project construction announcements. Such are the components of domestic demand. This questionable increase is reported as "growth of 0.5%" over the first quarter, while the "slow down" refers to the year-on-year figures.

Is there any way to get a clearer picture of economic events? Thankfully, the answer is yes, with the result about what was expected. To see the translated version one only needs to look at the moving average of the GDP taken two months at a time. In Figure 1, the moving average of the GDP, for first quarter 2000 to date, is plotted in red, while the raw data is plotted in blue. It is possible to see the trend as a smoothed curve, one which rises sharply to a peak, then turns sharply down with the new millenium.

Looking at the smoothed curve, it is clear that the country is indeed in a steep decline, and has been for two consecutive quarters. No amount of tangled talk can transform the curve into a 'recovery' or even a 'flattening out' of the national economy. The trend shows a steep decline, and there are no indications that improvement is to be expected in the coming months.

It is possible to project what the GDP will be for the third and fourth quarters. Figure 2 attempts to do this, using the smoothed moving averages, although any prediction has its limits of accuracy. But national GDP figures don't usually change radically in the absence of powerful external factors, and it is unlikely the curve will be significantly deflected from what is shown.

The probability for such a departure from the plotted curve would require significant improvement in the amount of business activity conducted between our major trading partners. But Japan offers no hope for improvement, Singapore continues to experience significant problems of its own, and the US, in spite of lower interest rates and tax incentives, has yet to respond.