Friday, May 30, 2014

World Cup Prediction: Brazil (natch)

These guys have waaaay too much time on their hands (excerpt):

World Cup 2014 Special
Brazil set to succeed on the pitch …but it’s an uphill battle for the economy

While there is not much to cheer about regarding the Brazilian economy, we believe the Brazilian population will at least be able to cheer about its national team’s result at the upcoming football World Cup.

In this document, we present our forecasts not only for the Brazilian economy but also for the outcome of the World Cup. We have estimated an econometric model for the World Cup result based on data from the five previous World Cup tournaments and used the model parameters to simulate the upcoming World Cup and the results are clear to us.

In our view, home advantage, a large population and a strong football tradition will ensure that Brazil wins the World Cup. We believe Argentina will be in the running but will lose to Brazil in the final. Germany will take third place.

However, chance is a major factor in football, so nothing is given – not even for Brazil. To describe these factors we have used so-called Monte Carlo simulations to estimate the probability of different teams winning the World Cup. Brazil is strong favourite, with our simulation indicating a 45% chance that Brazil will win the tournament. We calculate the runners up are much less likely to win, with Argentina having an 8.1% chance, Germany 7.6% and France 6.7%.

[H/T Lars Christensen]

Growth And Taxation

Growth and taxation – it seems like a contradiction in terms. Taxation tends to create economic distortions, affecting decisions on consumption, investment and savings. This happens because taxes change the incentives facing economic agents – a consumption tax reduces the propensity to consume, an income tax reduces the incentive to work and invest. Subsidies work in the exact opposite way.

But there are forms of taxation that can promote growth – or at the very least, be less distortionary. That’s a point that’s almost totally absent from the debate surrounding the implementation of GST in Malaysia:

  1. As a value-added tax, it’s far less distortionary than the SST system that’s currently in place; and
  2. Because just like in any other country where a VAT has been implemented, exports will be zero-rated. As a result, GST will also actually give a (minor) fillip to growth relative to the SST system

Wednesday, May 28, 2014

March 2014 Employment

If there’s anything that will tell you the economy isn’t quite as good as the 1Q2014 numbers indicate, it should be employment (‘000):


Not to put too fine a point to it, job creation in 1Q2014 sucked – in fact, it’s been pretty poor since the middle of last year.

Monday, May 26, 2014

Penalty Kicks and Economic Policy

There’s a link? There is a metaphorical one, according to Stephen Gordon (excerpt):

Action bias and the political economy of penalty kicks

Most penalty kicks result in a goal; this is why soccer players go to such comical lengths to draw a penalty…The usual strategy is to try and guess where the ball will be kicked and to jump in that direction. Surprisingly enough, the tactic of not jumping - that is, guessing that the ball will be kicked down the middle - is under-utilised.

An interesting study from a group of Israeli researchers (Bar-Eli et al, 2007) offers a plausible explanation: 'action bias'…

Friday, May 23, 2014

April 2014 Consumer Prices

The CPI numbers for April were released late on Wednesday, and they point to benign inflationary pressure (log annual and monthly changes; 2000=100):


The annual change is still high, but the monthly growth numbers show the impact of price hikes of subsidised goods has dissipated away, showing little in the way of any pass-through into other prices.

Tuesday, May 20, 2014

Household Debt: One Small Victory At A Time

In both financial and economic theory, debt repayment is most effective when the highest cost debt is tackled first, i.e. pay off the debt that has the highest interest rate. That’s the rational solution, as it reduces the burden of debt the fastest.

But this abstracts from the very human desire and motivation to reduce debt. From that perspective, reducing the smallest debt burdens is actually the most effective strategy. And here’s the proof (abstract):

Small Victories: Creating Intrinsic Motivation in Savings and Debt Reduction
Alexander L. Brown, Joanna N. Lahey

Saving when faced with the immediate option to spend is an unpleasant but not conceptually difficult task. One popular approach contradicts traditional economic theory by suggesting that people in debt should pay off their debts from smallest size to largest regardless of interest rate, to realize quick motivational gains from eliminating debts. We more broadly define this idea as “small victories” and discuss, model, and empirically examine alternative behavioral theories that might explain it. Using a laboratory computer task, we test the validity of these predictions by breaking down this approach into component parts and examining their efficacy. Consistent with the idea of small victories, we find that when a mildly unpleasant task is broken down into parts of unequal size, subjects complete these parts faster when they are arranged in ascending order (i.e, from smallest to largest) rather than descending order (i.e., from largest to smallest). Yet when subjects are given the choice over three different orderings, subjects choose the ascending ordering least often. Given the magnitude of our results, we briefly discuss the possible efficacy of these alternative methods in actual debt repayment scenarios.

Quick wins, low-hanging fruit, small victories – whatever way you want to call it, making progress however small is a necessary part of any process. At the risk of over-generalising, breaking up difficult tasks into small, achievable segments increases the rate of success. Taking it even further, any success however minor should be celebrated, because these are just milestones to greater achievement.

The human mind works in wonderfully strange and mysterious ways.

Technical Notes

Alexander L. Brown, Joanna N. Lahey, "Small Victories: Creating Intrinsic Motivation in Savings and Debt Reduction", NBER Working Paper No. 20125, May 2014

Monday, May 19, 2014

My Rant Of The Day: Misusing The Word “Print”

The last few months I’ve been forced into reading a lot of analyst reports. While for the most part it’s been worthwhile in terms of gauging what other people are thinking, there’s something about these reports that just bugs the hell out of me.

And that is the use – or rather, misuse – of the word “print”.

This isn’t even a problem just with our local guys either, I see the word often used by foreign bank and broker analysts as well. As in, “the latest GDP print” or “compared to the 4Q2013 BOP print”.

From the context, these guys are using the word “print” as synonymous with “record” or “report”. But in English, “print” doesn’t carry the same meaning, connotation or usage as the latter two words. To me, a “print” is a reproduction of something, not the thing itself.

So when people refer to a report as a “print”, I have visions of them queuing up to get reports as they’re published, and fastidiously making reference to their own individual copies while writing out their commentaries. Since this isn’t what anybody actually does, referring to economic data as coming from a “print” makes me cringe. It’s as if the form of a report (a publication) is more important than the data it conveys (the actual numbers).

Here’s the link to the Merriam-Webster definition, and here’s the link for the Oxford Dictionaries definition.

Nowhere in those definitions is “print” used in a way that could denote a report or the content of a report – only the process by which it is made (verb) or the form it can take (noun). The image that I usually carry in my head, when using “print” as a noun, is the same definition used by New York’s Museum of Modern Art:

“A print is a work of art made up of ink on paper and existing in multiple examples. It is created not by drawing directly on paper , but through an indirect transfer process.”

The stuff I have hanging on my office wall are prints. The data and reports issued by national statistical authorities are NOT prints.

Unless you happen to think these are works of art.

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).

Wednesday, May 14, 2014

March 2014 Industrial Production

The March numbers that came out on Monday didn’t show a full picture of health, but did confirm that 1Q2014 growth is going to be pretty decent (log annual and monthly changes; seasonally adjusted; 2000=100):



The REAL Impact of the ETP: The Recession That Never Was

Following on from the 2013 annual reports and quite apart from any benefits that might accrue over the next few years, this is what the ETP has done for Malaysia (RM millions and log annual changes; 2005 prices):



Monday, May 12, 2014

BNM Watch: OPR Unchanged, But Not For Long

Last week’s Monetary Policy Committee statement made very clear that policy tightening of some sort or another is on the way (excerpt; emphasis added):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

Global growth moderated in the first quarter with several key economies affected by weather-related and policy-induced factors. Looking ahead, the global economy is expected to remain on a path of gradual recovery….

…For Malaysia, latest indicators suggest that the domestic economy continued to register favourable performance in the first quarter. Going forward, growth will remain anchored by domestic demand with additional support from the improved external environment….

…Inflation has stabilised in recent months amid the more favourable weather conditions and as the impact of the price adjustments for utilities and energy moderate. Going forward, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors.

Amid the firm growth prospects and inflation remaining above its long-run average, there are signs of the continued build-up of financial imbalances. While the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances. Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy.

The key paragraph is the last one, with its ominous warning of “degree of monetary accommodation may need to be adjusted”. That’s about as clear a signal as can be given.

Thursday, May 8, 2014

March 2014 External Trade

Yesterday’s trade report was a mix of good and bad (log annual and monthly changes; seasonally adjusted):


Export growth was pretty good, at 8.4% in log terms on an annual basis. On a monthly comparison however, exports dropped 4.7%. Import growth was near zero on a yearly basis, and contracted on a monthly basis.

Wednesday, May 7, 2014

March 2014 Monetary Conditions

Monetary conditions in March appear to have tightened (log annual and monthly changes; seasonally adjusted):


M2 growth fell to 6.0% yoy, which is more than a little worrying – as a rule of thumb, you want to see money growth approximate real growth plus inflation. Having said that, real indicators have been pretty strong, and loan applications (demand) and especially approvals (supply) look decent; these imply that much of the drop off in money growth is coming from other components of M2.