May 2018
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Deflation Case Study: Malaysia

This is the first in what will eventually be an extensive list of country based case studies examining the case for or against deflation around different corners of the globe. They will not all be the same, and I expect the analysis to evolve and develop as my own ideas change over time as well. Some will be detailed others on the sparse side, a lot will depend on the individual data available. Hopefully over the coming months and years a clear picture will develop one way or another about how deep (or not) the global debt deflation experience will be.

The first country to be studied is one I had the pleasure of recently visiting. Malaysia has certainly changed a lot over the last decade or so. It has transformed from a country with chaotic and constantly honking traffic to one where traffic lights and rules hold sway and the air is free from noise pollution. Orderly almost to the extent of Singapore. Traffic is of course a metaphor for the country as a whole; a country that has a vision of acheiving ‘developed’ status by the year 2020.  Anyone who has seen how Malaysia has transformed over the last decade would not doubt that the goal is attainable.

However, as always there are stumbling blocks and the global financial crisis presents a substantial challenge to an emerging economy such as Malaysia.

Are there signs of deflation taking hold in the Malaysian economy?

The first point of call is the most simple, looking at the CPI. As I will explain over time on this blog the CPI indexes really should not be seen as anything more than rough guides on price levels in any given country. They are crude measures at best. Statisticians put a great deal of effort worldwide into coming up with what they think are representative bundles of goods and services that somehow represent the overall price change for an economy but the venture is always doomed to be a subjective potshot. Sadly, these indices the world over are scrutinised intensely by economists and financial analysts. Their release dates are met with hushed tones and the number provided can change stockmarkets in an instance.

But in reality while they are the best guide we have they should never be considered anything much more than useful and interesting. If you read lots of economic literature it would have you beleive that the CPI figure is the be all and end all in determining deflation or inflation. Put very simple a positive number is inflation and a negative number is deflation. In and of itself this definition is technically true. But it is a very simplistic definition of deflation and one that relies on a measure that is not all that reliable as a true representation of the overall price level in an economy.

But given the limitation we will still look at CPI and as you can see from the following graph the index has recently experienced some technical deflation. Although if you look at the overall trend it seems CPI is still tracking along its medium term growth path.



Something you would expect to see in a deflation scenario is consumers paying down their debts. As you can see from the following graph the annual growth in outstanding credit card debts has slowed dramatically since mid 2007. This is still not an indicator of debts being reduced it is merely a slowdown of the accumulation of debt at this stage. A preliminary look reveals that credit growth is also still growing, although at a lower pace for other credit and loan facilities apart from credit cards.

Annual Growth on Outstanding Balance on Credit Cards


The Producer Price index has basically fallen off a cliff since the second half of 2008, lead mainly by a marked drop off in commodities prices.



Overall the evidence does not suggest a substantial deflationary episode in Malaysia as yet. Money and credit supply seem to be holding up so far (see link to Central Bank Statistics below).  While CPI and PPI show certain signs of turning negative they are not enough evidence alone. It would have been nice to examine more data, specifically anything else related to credit conditions and asset price conditions in the country.

Data was sourced from the Central Bank of Malaysia.

Anyone wishing to read a very informative regular economic analysis of the Malaysian economy should read the Economics Malaysia blog. A fine source of economic commentary on my favourite peninsula.

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