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Q2 GDP: The good, bad and ugly

Interestingly enough, the release of the National Economic and Social Development Board's official analysis of the second quarter was received with mixed reviews.

Some said it was good, some said it was a poor showing, while some even shrugged their shoulders, reflecting that it was expected.

Why was it so hard to get a consensus on the NESDB figures? Well, let's review some "good, bad and ugly" details of this release.

Let's start with the "good". This will allow us to follow market sentiment a little more closely. The good news of course was that there was an expansion of gross domestic product in the second quarter, however small. The market expected no growth, while domestic houses even expected a slightly negative figure. So a growth rate of 0.4 per cent from last year, despite being close to our call of 0.3 per cent, is actually good news to the market.

Not only did the economy expand from the same quarter last year, it also expanded from the previous first quarter of 2014 by 0.9 per cent seasonally adjusted, or a whopping annualised rate of 3.6 per cent.

This means the economy avoided a "technical" recession - the term most dreaded by the market - which refers to two straight quarterly contractions. But it also means the economic recovery may have begun.

Unbeknown to most, but soon to be realised by the market, is the fact that consumption has been growing. Mind you, after the government's first-car tax-break scheme ended, domestic consumption was in a streak of slides for the past three quarters, hurting regional economies and small and medium-sized enterprises the most.

So having consumption marginally expand by 0.2 per cent should be celebrated. Better yet, remove vehicle expenditures, which remain battered by the first-car scheme, and private consumption grew 3.2 per cent for all other goods. That's a sign of consumption recovery.

Other growth components of the NESDB release were merchandise exports, up 1.5 per cent in real terms, in contrast to their half-year performance in US dollars, which was down 0.4 per cent, and government spending, not including investment, that had the strongest showing of 1.9 per cent last quarter.

Turning now to the "bad": This space is for those components that remained a major drag on the economy - investment being one of them. Investment continued its contraction at 6.9 per cent for the fourth quarter in a row. Both private and public investments are equally guilty. In both categories, investment in construction and equipment fell.

Firms are not expanding, nor are they building. And as for the government's projects, we saw only 49-per-cent disbursement of the state budget by the end of the third fiscal quarter. In plain words, investment showed no signs of recovery.

The next item on the bad list is tourism. Despite a surprise in the export of goods, the export of services, mostly tourism, contracted 6.4 per cent from the same time last year.

Tourism has been by far the hardest-hit industry since the beginning of the political crisis. And it didn't recover like other industries when the military took over in late May, because of the declaration of a curfew and martial law. So its poor performance didn't come as a surprise. But should we be worried? Yes.

Last, the "ugly". Simply put, the growth rate was there, but growth wasn't. The second-quarter GDP-growth figure was artificial.

To appreciate its artificiality, one needs to recall the simple GDP formula, which comes from summing consumption, investment, government spending and exports and subtracting imports.

The sum of the first four components, which reflects real demand in the economy, contracted 1.2 per cent from last year, only slightly better than the 2.2-per-cent contraction in the first quarter. Add to that dwindling inventories and the economy in fact contracted 3.3 per cent in the second quarter.

So, in summary, if we view the second-quarter economic performance in business terms, our sales contracted 1.2 per cent from a year earlier, while our revenues fell 3.3 per cent. However, we were able to make smaller deductions because of the slowdown in orders of raw materials and the delay in investment. In net terms, profit grew barely by 0.4 per cent, and the economy preserved positive cash flow.

And now you know why the NESDB release got a mixed reception. Because the results were at best mixed.

Benjarong Suwankiri, team head of TMB Analytics, the economic analysis unit of TMB Bank, can be reached at tmbanalytics@tmbbank.com. Views expressed in this article are those of the author and not of TMB Bank nor its executives.


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