A Wide Disconnect Between Growth Targets & Reality

There seems to be a wide disconnect between what Malaysia's Ministry of Finance projected GDP growth (+2% to +3%) to be for 2010 and what the Prime Minister has in mind in terms of his long-term forecast of economic growth from today till 2020.

Notwithstanding the fact that he made an about-turn within a day from 9% GDP growth to 6% GDP growth, the PM's target of 6% real GDP growth does not seem to sit well with his objective to raise per capita GDP from US$7,000 to US$17,000 by 2020. Per capita GDP is always stated in nominal terms, so this implies an annualised nominal growth rate of 8.4%.

Assuming long-term inflation in the next ten years is in line with the historical average of 3% ( a fair assumption given that cost-push factors from energy and food inflation), then an 8.4% nominal GDP growth translates into a real GDP growth rate of 5.4%.

To see whether this is realistic, we need to ask three simple questions:

1. What was Msia's average GDP growth in the last ten years (excluding the recession year of 2009)?

Answer: 5.5%.

2. What were the global economic conditions for this type of growth?

Answer: The US economy was growing 2.6% while the Singapore economy was growing at an average of 5.6% amidst a credit boom in the US starting from 2003 to 2007.

3. What was the standard deviation of the growth rates of these three economies? In other words, how volatile are these economies?

Answer: The US economy had a standard deviation (SD) of 1.3% with the lower range of growth at 1.3% (average growth of 2.6% less 1.3%) while the Singapore economy has an SD of 3.9% with the lower range of growth at 1.7%. For Msia, the SD is 2% and the lower range of growth is 3.5% (higher range at 7.5%).

Given that Malaysia has a a fairly high correlation (R sq=79%) with the Singapore economy and the Sing economy in turn is correlated with the US economy (R sq=60%), then a period of sub-par growth in the US for the next ten years suggests that Singapore and Msia's economy will also be below their past 10-year track records. Unless either economy rebalances and realigns their economic structures towards new growth engines such as China and India.

My conclusion is that a long-term GDP growth rate of 3.5% for Msia is more realistic than the 5.4% implied by the 2020 goals of the PM.