Groan: KLCI Tumbles Below 1000 Mark
September 18, 2008
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Yeap, our stock exchange is being hammered by diminishing investor confidence, both in and out of the country. This time, it has nothing to do with our country’s political uncertainties, but with the problems plaguing the US economy.
As of writing, the KLCI has slumped 3.7% or 38.13 points to 964.86, following the Dow Jones freefall of 4.06% in yesterday’s trading. This just proves that the Malaysian stock exchange (and I don’t want to use this in the same breath as the word “economy”) is still unable to decouple itself from the happenings in the US of A. The next time any politician or minister tells you otherwise, just remember to ignore that person.
So is this a good time to pick up on good deals? Question is, does anyone even see where the bottom will be? Are things looking up in the short term? Would be great if everyone knew the answer to those questions (wait, that WOULD be disastrous). Meanwhile, if you’re going ’shopping’ in the market, just remind yourself to never invest any amount that will cause you to lose any sleep. I guess that’s the only advice I can give everyone, and probably an advice that I should apply to myself as well.
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A Cool Hard Look At Our Economic Figures
Given that government departments do not analyse figures (even publications from producers of such data are contented to point out to the ups and downs of selected indicators such as the GDP, CPI, IPP etc , packaged together with unfriendly technical notes), the responsibility falls squarely on the economic columnists/editors of our newspapers. For this purpose, more depth and numeracy are expected. For a start, the data issues raised in the highly acclaimed Financial Times article by Chris Giles (below) are very relevant to Malaysia. More frightening is the ‘legitimate’ practice of equating pay-rise/increments(including the recent salary revision for public servants) to growth in productivity of government servants! This exposes a plausible policy ploy to prop-up the overall GDP by rewarding public servants when the private sector is bleeding and desperately needs a more direct form of intervention.
Lies, damn lies and befuddlement
By Chris Giles
Published: July 26 2007 19:27 | Last updated: July 26 2007 19:27
Alistair Darling says the output of the City of London is “absolutely critical”. The chancellor is spot on.
China’s economy inspires awe owing to its industrial muscle, but the British economy is still almost as large as China’s. Our strength comes from the services sector, enabling goods to be designed, built, financed, transported and sold. We are especially good at business services, whose growth since 1992 has been stunning. Then, the Office for National Statistics says, the sector accounted for just under a quarter of the economy. By 2004, it accounted for a third. The share of manufacturing dropped from 21 per cent to 14 per cent over the same period.
Even more impressive is the expectation that the share of business services will exceed 40 per cent of the economy by the end of the decade. Its contribution has risen by an average of 1 percentage point a year since 1997 and next year the ONS will include in the national accounts a proper estimate of the value of banking services. Alone, that will add roughly 1.7 per cent to gross domestic product.
But, for all the undoubted importance of lawyers, accountants, estate agents, architects, bankers and other employees of business services companies, we do not really know with any certainty what is going on.
The statistics on business services are rather like a cheap sausage; alluring on the outside, but the more you delve into the ingredients, the more queasy you feel. Start with the cash figures for output. A quarter of the recorded output of business services, 8 per cent of GDP, is “letting of dwellings”. Anyone thinking that this is a reflection of the buy-to-let phenomenon would be wrong. Most of the £83bn contribution to the UK economy in 2004 is the ONS’s estimate of how much it would cost property owners to rent their own homes.
The reason that notional rents are included in GDP is to stop international economic comparisons being distorted by patterns of home ownership. Without the adjustment, Germany would appear richer and more productive than the UK simply because most people there rent their homes from others with a recorded cash transaction. But in estimating this huge adjustment, the ONS has to guess the notional private sector rental value of every UK home using some heroic assumptions. The upshot is that if planning restrictions damage the UK economy and force rents up, measured GDP increases, improving Britain’s apparent productivity performance relative to other countries. Rental inflation also allows the government to borrow more, since one of its borrowing rules limits debt to 40 per cent of national income. This is perverse. And at 8 per cent of GDP, it matters.
New research by Professor Jonathan Haskel of Queen Mary College, London* casts further doubt on how far we should take the statistics at face value. International rules on what counts as business investment are outdated in a service economy, he argues. Correctly measuring things such as research and development or development of new financial products as investment – because the expenditure has a future value – would raise Britain’s GDP by 13 per cent, his research suggests.
If these two examples suggest the measurement of the output of business services is difficult, even bigger problems lie in differentiating real growth from changes in prices.
The soon-to-be-introduced better measurement of financial services is a huge step forward for the ONS. But it also has the worrying aspect that measured real GDP will often go up when interest rates rise. The reason: banks have traditionally used interest rate rises to improve margins by jacking up interest rates on loans by more than on deposits. This is clearly inflation, but the measurement of inflation-adjusted interest rate spreads are so difficult that under the ONS’s chosen methodology, it will be recorded as an increase in banking activity and productivity.
Or take lawyers. A survey in Legal Week recently found that law firms had increased their hourly rates by 6 to 10 per cent. That is inflation. But it will appear as increased output in the index of services, because data shortages force the ONS to adjust law firms’ turnover for inflation using an index of the wages of estate agents, among others. In other words, pay a lawyer 10 per cent more and Britain’s output and productivity rises. But pay a doctor 10 per cent more and it is inflation, because output in health services is measured by the amount doctors do.
I have no idea whether the real growth of business services is bigger or smaller than it appears in the national accounts. But I am sure it is not as it seems and, at 40 per cent of GDP, any errors in business services can paint a highly misleading picture of the economy. The ONS is aware of the problems and is working on improvements. We should give them enough money to do the job well. In the meantime, sensible people should not treat the national accounts as gospel. It is no wonder the Bank of England’s Monetary Policy Committee is increasingly falling out and its members form their views from impressionistic surveys of businesses as much as from the official data.
chris.giles@ft.com
Copyright The Financial Times Limited 2008
October 15, 2008 at 6:36 am