Consumer spending key to economy’s resilience

by: Prof. Yeah Kim Leng, Director of Economic Studies Program at Jeffrey Cheah In­stitute on Southeast Asia

Malaysia’s higher-than-expected gross domestic product (GDP) growth of 5.6 per cent in the first quarter has been accompanied by the further strengthening of consumer spending. Often referred to as household spending, total consumer spending is denoted by private consumption in the national accounts that show how the country’s income is used.

The first quarter’s private consumption growth of 6.6 per cent is higher than the previous quarter’s 6.1 per cent and 6.0 per cent in 2016. It is slightly below an average of 6.9 per cent recorded annually since the 2007-09 global financial crisis. The improved first quarter performance suggests that consumer spending behaviour has normalised.

Private consumption is playing an increasingly important role in the country’s growth and resilience against external shocks. Not only is it the largest domestic demand component, amounting to 54.1 per cent of GDP, but its growth has also exceeded overall economic growth in all years except one, since 2000. On average, its annual growth since 2000 has been 1.8 percentage points higher than that of GDP.

In contrast, private consumption growth was lower by 1.1 and 1.7 percentage points in the 1980s and 1990s respectively. During the post-global crisis period from 2010-2016, private consumption growth averaged close to seven per cent annually, or 1.5 percentage points higher than GDP growth.

Rising consumption trend

Malaysia’s sustained consumption-driven growth since 2000 particularly in the aftermath of the global financial crisis is evident whereby the increase in household spending contributed on average 66 per cent of GDP growth compared to around slightly over 30 per cent in the 1980s and 1990s. Despite the rising contribution to growth, its share to GDP remains below that for high-income countries which averaged 60 per cent but above the average of 51 per cent for upper-middle income countries.

Besides rising income, the steady consumption growth can be attributed to the country’s young and growing population and well-developed financial system. Positive expectations of future earnings and wealth especially for middle and upper income households, and fiscal support in the form of income transfers (such as BRIM) have also contributed to the rising consumption trend.

There are, however, influencing factors and forces that need to be taken into consideration when examining future consumption growth prospects and their implications for businesses and government policymakers. These include changes in spending patterns arising from shifts in demographics, debt level, technology influences and changing consumer tastes and preferences.

Changes in spending patterns

Food and non-alcoholic beverages which used to be largest component in household expenditure has shrunk from 24 per cent in the 2000 to 20 per cent in 2009 and 19 per cent in 2014. It has been overtaken by housing and utilities which rose to 24 per cent in 2014 from 22 per cent a decade ago. However, the share of discretionary items such as hotels and restaurants, recreation and culture and miscellaneous goods and services such as financial, insurance, personal care services has remained relatively unchanged over the decade.

The stagnant share of these income-sensitive spending adds to the evidence of a slower rise in household income as well as the constraints posed by high household indebtedness.

Influences of income inequality, debt and cost of living

While the country’s rising consumption reflects the changes in household income, expenditure and savings patterns, its resilience to demand and supply shocks also depends upon the state of household finances. The ability of households to smooth consumption in the face of employment, interest rate, inflation and wage shocks is determined by savings buffers, access to borrowing and expectations of whether the shock is temporary or permanent in nature. Importantly, lower income households have lower ability to smooth expenditures. Their spending behaviours are therefore more sensitive to fluctuations in income.

The strong consumption response to the government’s income transfer programme is indicative of the higher marginal propensity of the lower income households to spend their current income. According to estimates by Bank Negara Malaysia, households earning less than RM1,000 per month will, on average, spend RM0.81 out of RM1 of additional income while those earning more than RM10,000 per month only spend RM0.18.

Implications for consumption sustainability

With the current rising export trend, the extent of spill-overs of higher export earnings as well as firmer commodity prices to household spending through higher wages, employment growth and stronger consumer sentiments will determine whether private consumption growth can hit the seven per cent trend growth. Given the country’s marked income inequality and the dependence on fiscal transfers to alleviate the rising cost of living burden on the low income households, as well as the current high household indebtedness, the prognosis for a trend growth in private consumption could be a tad optimistic but a modest expectation of a 6.0-6.5 per cent increase is within sight this year.

By Prof. Yeah Kim Leng | 1 June 2017

Professor Yeah Kim Leng is the Director of Economic Studies Program at Jeffrey Cheah In­stitute on Southeast Asia at Sunway University and Professor of Eco­nomics at Sunway University Business School. He is also an external member of Bank Negara Malaysia’s Monetary Policy Committee. The views expressed in this article are his own.

First appeared in the New Straits Times

Modified by Low Wai Sern