Low inflation because the election is getting closer(?)

Don’t follow RON95 prices, follow food prices instead.

Read somewhere where the moderation of food prices was because of the election is getting closer was nonsense in my opinion. Anyway, I genuinely underestimate my own forecast earlier. Now, looking at the graph below, you can see the correlation between Malaysia’s overall inflation and world food prices (you can obtain this number from Food and Agriculture Organization). You can ignore between April 2015 to December 2015 due to the implementation of GST (one time event).

Source: CEIC, Food and Agriculture Organization

Moving on to a larger scale, the main contributors were sugar prices, dairy, and oil.

Source: Food and Agriculture Organization

And Malaysia is not alone on this matter. Our neighboring countries (expect Indonesia, since the government subsidizes few of their food products), had the same trend as well.

Source: CEIC, Food and Agriculture Organization

Assuming growth in food prices to be slower for the next few months, I think you can guess where our inflation is heading.

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Food prices in Malaysia – We don’t have enough (sea)food

Thomas Malthus must be saying “well, I’ve warned you guys!” if he reads this. Yes, at this moment, we do not have enough food to feed the whole world right now, and possibly in the next 10 years.

I will jump straight into conclusion here. The reason why inflation is on the rise is because of disequilibrium in supply and demand.

This is also a global phenomenon. But what I found is that too many people are blaming the currency, structural, and poor taxation system because of increasing inflation.

Let me tell what is really going on in this world right now. More countries now are leaving poverty, including India, China, and other few countries in Africa. So, when you leave poverty, one thing for sure is that your income increases. Plus, your lifestyle and calorie intake will change too. When I mentioned calorie intake, that means your diet/food intake will be different. You will eat less grain products, and eat more meat and fish to suit your calorie intake.

Screen Shot 2018-04-13 at 9.59.09 PMSource: Our World in Data

That was from the demand side. Now let’s look this from the supply side. At this moment, the world is running short of food. There are two articles here perfectly picture on how the world do not have sufficient food now (refer appendix). On top of this, there are other exogenous variables affecting food supply such as climate change.

Combining these two stories, clearly there is a disequilibrium in supply and demand. As population grows and more people are leaving poverty, while food supply is insufficient, meaning we have more demand than supply. This explains why price of food is going up.

So this is food inflation in Malaysia. Simple arithmetic (calculate the slope) shows that the increase in fish & seafood is faster than the rest. (maybe this is why sushi and sahshimi are so damn expensive nowadays!)

Malaysia CPI (2010=100)

Globally, food prices are increasing as well including dairy, meat products, and aquaculture products. Below is the world food price.

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Source: Food and Agriculture Organization of the United Nations

But the interesting part is, I am only seeing countries in these region are affected by this, including Thailand, Philippines, Indonesia, and Singapore. Other developed countries including the US, the UK, the Eurozone, Japan, and China have a different picture. So I suspect geography plays a role as well.

This means Malaysia is not alone on this.

So the argument of “everything is expensive because of our Ringgit”, or “GST is the main culprit” are invalid.

Appendix

Farming the World: China’s Epic Race to Avoid a Food Crisis, by Bloomberg

Global Demand for Food Is Rising. Can We Meet It? by Harvard Business Review

Women in Malaysia – Few bright spots in the labor market

Got this from the IMF:

“Still, Malaysia has the potential to do more. As our Chart of the Week shows, Malaysia’s labor force participation rate for women, when compared to some of the regional economies and the Organization for Economic Co-operation and Development (OECD) average, remains just above 54 percent. This is low, both in absolute and relative terms. As a comparison, men’s participation rate is about 80 percent.”

For this to happen, education is key. Enrollment rates in high school and university education are now higher for women than for men, and this can help explain the higher share of skilled occupations in women’s employment.

But for less educated women, labor force participation rates are particularly lower relative to men. And incidence of unemployment is higher for women, particularly for those living in rural areas, aged below 29 years, or primary school educated.”

Theoretically speaking, Solow growth model suggests that for an economy to grow, you will need two things; labor and capital.

There is no surprise, that more countries now are turning into their best resource available: The women (Shinzo Abe must agree with this statement).

Let’s see how females in Malaysia are weighed in.

For female in the urban area, majority of them were working in the wholesale & retail, followed by manufacturing, and accommodation & food services. Basically, there was growth in every sectors except one: “Households as Employers”. This means more women now prefer to work full-time instead, instead of working independently (meaning that the hypothesis of women prefer/will work independently in the future could be invalid. I welcome your opinion on this).

There was a decreasing trend for female in the rural area. Migration could explain this, as more women are educated, they are likely to move into the urban area for job opportunities.

Except these two sectors – Administrative & Support Services, and Human Health & Social Work.

But I am not interested to talk about the past, I am more interested to talk about what is going (or likely) to happen. As the world is entering another phase of industrialization (Industrial Revolution 4.0), there are many jobs are about to be replaced with robots. Referring from this article, those who are in the wholesale & retail, services, and F&B are likely to be automated

Going back to the article, there is one government measure I have a slight doubt. Let me quote again from the article:

“Setting a minimum of 30 percent participation of women in boards of government-linked companies and investment companies by end-2018”

There was an interesting article written regarding Norway on imposing quotas.

In summary, these were the findings:

“We see no evidence of improvements for women working in firms most affected by the reform, suggesting that the new female board members are not significantly changing the opportunities for women within the firm. Additionally, we find no evidence of effects on the set of highly qualified women who would be candidates for board positions, regardless of firm.”

Sure, trying to squeeze in more female in top positions is fine, but possibly not good enough and less effective. This means that what the government is trying to do now might have a little, or no impact on attracting more women into employment.

I would say that the female employment in Malaysia is doing pretty well so far, and I agree with the IMF that more steps could be done by the government, and private sector. More women in Malaysia now are educated (go to any public/private universities, you could see that the ratio male to female is probably 1 to 4), and more of them will be entering the workforce. Talking about a super long term view, my sense is, women will need more help compare to men, as the sectors they working in is very highly to be automated.

RM1,500 minimum wage. Possible?

I found this interesting since both the current government and the opposition want to increase the national minimum wage in their manifesto.

Let me quote from both of those sides:

From “Parti Biru”:

Meningkatkan gaji minimum pekerja secara berperingkat kepada sekurang-kurangnya RM1,500 dalam tempoh lima tahun.

From “Parti Merah”:

Kadar gaji minimum akan dinaikkan kepada RM1,500 sebulan di seluruh negara dalam penggal pertama pentadbiran Kerajaan Pakatan Harapan, dan kami akan menyemak kadar ini setiap 2 tahun.

Alright. Let me tell you a story (this is fictional, any similiarity in real life events is just coincidence).

Let’s say I am a manager for a well known fashion company for women (wedding dresses, everyday clothing, hijab, well you get the idea) in the country. On monthly basis, my total revenue is RM40,000.

In a month, let’s say I spend RM10,000 on capital (for textiles, electricity, gas for the company car)

In terms of labour, lets say I have 10 employees, and I pay them RM1,200 on monthly basis. That means, on monthly basis, my labor cost is RM12,000 (RM1,200 multiply with 10 employees).

Sum it all up, my total cost is RM22,0000.

That means my gross revenue is RM18,000 (Total revenue – total costs).

Stay with me on this, this is going to get tricky.

Let’s say tomorrow, the government imposes a new law, saying that the national minimum wage is RM1,500.

Ceteris peribus, my capital is still RM10,000, and I still make RM40,000. But can you count my total labor cost?

That’s right. RM15,000 (RM1,500 multiply with 10 employees).

Meaning that my gross revenue now is RM15,000. Meaning that after minimum wage increase, I have to pay an extra RM3,000 on labor. In other word, my labor costs now had become a little bit expensive.

This explains why companies in Malaysia in the end of last year made a noise on the minimum wage increase. If I were the manager, and I insist to have a gross revenue of RM18,000 per month, i have two choices : (i) Lay off some of my workers, or (ii) cut some costs on capital (no more using the company car, take Grab instead since it is cheaper).

This is just a story I made. But there were numerous studies also pointed out that an increase in minimum wage had a little impact on employment.

To be frank, I am not that worried if the government wants to increase the minimum wage. What worries is me is when minimum wage starts to hurt the economy. There were numbers of studies back up the point I made. (Refer appendix). The study on Seattle was also a great example, since it raised the same question last year.

The rule of thumb is, a minimum wage should be around 40-45% of the national median income (the research is 12 years old, but still relevant). At this moment, the median income for Malaysia is RM1,721 (RM1,685 for female). Meaning that the optimal amount should be around RM690.

What I am trying to imply here, regardless of your school of thought whether minimum wage should be pegged to median wage, or inflation, is that policy makers should not play around with minimum wage. I think it is fair enough that we are giving some sort of insurance for employees, but one thing we don’t really talk about is that the companies are the ones who make the investments.

I wouldn’t mind if 3 years down the road, our national median income goes up to RM4,000. But I don’t see this happening that soon.

Appendix

Are There Long-Run Effects of the Minimum Wage – Isaac Sorkin 

Three Out of Four Economists Recommend Raising the Minimum Wage! A Closer Look at the Debate Surrounding Seattle’s Minimum Wage Ordinance – Erica Bergman

Optimal minimum wage policy in competitive labor markets – David Lee & Emmanuel Saez

There is an odd statement used by BNM in its Annual Report

Here’s the statement, you can found it on page 84:

In particular, continued investments in the advanced economies will lend support to the global electronics upcycle as the boost from smartphone demand eases. Malaysia’s semiconductor exports (2017: 19.0% share of gross exports) will strongly benefit from the increasing pervasiveness of semiconductors used in automobiles and consumer electronics such as connected devices and smart appliances. Insights from the Bank’s regional economic surveillance suggest that exports of semiconductors for the automotive market is likely to remain firm on account of rising semiconductor content per vehicle and growing demand for advanced vehicle safety, infotainment and comfort systems.

“Semiconductors used in automobiles”.

I am a little bit skeptical on this. Haven’t seen growth for sales and production had grown that much since GFC.

Motor Vehicle Sales & Production.png

I got 1,300 problems, and trade war is one of them

Quoting this from Bloomberg:

The U.S. proposed imposing 25 percent tariffs on about $50 billion worth of Chinese-made products, focusing on high-tech items from semiconductors to lithium batteries while seeking to minimize the impact on American consumers.

“This level is appropriate both in light of the estimated harm to the U.S. economy, and to obtain elimination of China’s harmful acts, policies, and practices,” the U.S. Trade Representative’s office said in a report on Tuesday. The U.S. is targeting the 1,300 product lines to try and force China to change its intellectual property practices, the office said.

In deciding which products to hit, U.S. officials identified items that “benefit from Chinese industrial policies, including Made in China 2025,” USTR said, referring to Beijing’s plan to dominate key strategic technologies. The U.S. also picked products based on the principle of trying to minimize the effect on the U.S. economy and consumers, the office said.

In addition to advanced technologies such as communication satellites, the list includes products ranging from various types of steel to television components, medical devices, dishwashers, snow blowers and flame throwers. The proposed tariffs cover a number of sectors, from health care to aviation and auto parts.

China’s embassy to the U.S. said in a statement released late Tuesday that it “strongly condemns and firmly opposes” the tariffs.

“As the Chinese saying goes, it is only polite to reciprocate,” the embassy said, adding that China would take “corresponding measures of equal scale and strength against U.S. products.”

So I had a look at the list made by the USTR (58 pages long), there are few items they are targeting including pharmaceuticals goods, knitting machines, electric motors and generators, and (my personal favorite) “Bombs, grenades, torpedoes, mines, missiles and similar munitions of war and pts thereof; other ammunition projectiles & pts. thereof“. To be honest, I had no idea we were trading this until now.

Just in case if you are curious, if I cross-reference with our exports to the US/China and the list of items that the USTR had made, I would say around 15% of them are shipped China, and 34% are shipped to the US (comparing to overall shipment to respective countries).

Quite scary actually. If I assume all of those items are wiped off from the equation, we would lose RM211bn of overall exports of RM935b. And that is 23% of overall exports!

You can see the exact items from the file attached (in case you’re too lazy extract the data yourself from DOSM). You’re welcome.

Trade War – Time to take this seriously

Whatever your school of thought is, trade war is not good for any country.

What worries me at this moment, is both the US and China were acting cool on this. The US was saying that technically this won’t bring them into a trade war, while the Chinese said that they won’t retaliate (they did it anyway on Monday).

First thing first, some background check on both the US and China. For China, 19% of its exports were sent to the US ($338b out of $2.06t). While for the US, 8% of its exports were sent to China ($116b out of $1.42t).

All of this is a political warfare. If we break this down into a game theory, there is no dominant strategy for both parties, and being cooperative with each other is the best solution (no surprise here, go google Nash Equilibrium and you’ll know). But in this case, let’s assume the US moves first (meaning Trump will move first, China will reply later).

Now, assuming that the US will move first, the best strategy for both parties is to cooperate. But assuming the US will attack first, the best thing that China could do for themselves (and possibly for the whole economy) is to “cooperate”.

Slide3.PNG

Another thing I found interesting, is both the US and China might be less affected by all of these. Countries with high trade per GDP (trade dependent country) such as Singapore, Vietnam, UAE are  likely to hurt the most (Data from World Bank).

 

Slide1.PNG

Malaysia is likely to hurt too since our trade (percent per) GDP is 129%, which is quite high comparing to the world average (82%).