Macroeconomics Analysis

Analysis of Higher food, Fuel costs push up November inflation

Inflation is an indicator of the economic wealth of a country. The
inflation rate is used to measure the rate of change in overall price level of
goods and services that we consume. To calculate inflation of a country, the
Consumer Price Index (CPI) is used in most of the countries. CPI measures
inflation by calculating the price change in consumer goods and services from
the perspective of consumers.

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According to the article published by The Star on 20th
December 2017, titled “Higher food, Fuel costs push up November inflation”, the
inflation rate or CPI for November 2017 rose 3.4% from a year ago. The
Statistics Department said that based on seasonally adjusted term, the overall
CPI for November increased 0.7% as compared to October. Core inflation rose
2.2% in November versus a year ago. In this news article, the inflation is
caused due to higher transport and food costs, which is also called as
cost-push inflation.

The cost-push inflation happens when the demand for goods
increases due to the prices increase where fewer goods can be produced to
protect profit margins. There are many reasons why costs might rise:

a)     
Component costs. For
example, an increase in the prices of raw materials and other components.

b)     
Rising labour costs. It is caused
by wage increases. Wage costs often rise when unemployment is low because
skilled workers become scarce. Wages increase when people expect higher
inflation so the workers ask for more wages to protect their real incomes.

c)      
Expectations of inflation. When the prices
of goods and services increase, the people get concerned about the effects of
inflation on their real standard of living.

d)     
Higher indirect taxes. For example,
Value Added Tax. An increase of the duty on alcohol, fuels and cigarettes.
Depending on the price elasticity of demand and supply for their products,
suppliers may choose to pass on the burden of the tax onto consumers.

e)     
A fall in the exchange rate. It leads to
an increase in the prices of imported products such as essential raw materials,
components and finished products.

f)       
Monopoly employers/profit-push inflation – where dominants firms in a market use their market power (at
whatever level of demand) to increase prices well above costs.

 

 

 

 

 

 

 

 

             

Besides the cost-push inflation, demand –pull inflation is also
another type of inflation. It occurs when the economy demands more goods and
services than are available. When there is excess demand, producers can raise
their prices and achieve bigger profit margins. There are several causes of
demand-pull inflation:-

a)     
A depreciation of the exchange rate. It increases the price of imports and reduces the foreign price
of a country’s exports. If consumers buy fewer imports, while exports grow, AD
curve in Malaysia will rise – and there may be a multiplier effect on the level
of demand and output.

b)     
Higher demand from a fiscal stimulus. If direct taxes are reduced, consumers have more disposable income
causing demand to rise and higher government spending also causes higher
demand.  

 

 

 

 

 

 

 

 

In conclusion, if the inflation is too high, it is not good for
the economy and individuals because inflation always reduce the value of money.
Therefore, we have to solve the inflation problem. Firstly, the monetary policy
can be used to reduce inflation by increasing interest rate which helps
reducing the growth of aggregate demand. The lower aggregate demand will
decrease the inflation in economy. Secondly, the fiscal policy also can be used
to solve inflation. The government should increase tax and reduce the government
spending which can decrease the growth of aggregate demand.

Analysis of Ringgit slips against USD as Fed turns Hawkish

An exchange
rate means that the price of a nation’s currency in terms of another currency. Currency
is the paper bills and coins that are hold in the hands by the public. Thus,
the exchange rate has two elements. They are the domestic currency and foreign
currency. Moreover, exchange rates can also be quoted against another country’s
currency, are called as cross currency or cross rate. An exchange rate includes
a base currency and a quote currency.

Based on the
article “Ringgit slips against USD as Fed turns hawkish” from The Star Online,
it states that the ringgit depreciated against the US dollar today (From
1USD=RM3.96 to 1USD=RM3.95). The demand and supply information from the
quantity of money RM is show by the graph below. The vertical axis shows the
exchange rate for Malaysia rate, which is measured in U.S dollars. Once the
Malaysia Ringgit depreciated, demand of RM decrease, demand curve shift
leftward. Then, the exchange rate declines, and quantity of RM will decrease.

 

 

 

 

 

 

 

 

 

For further discussion, the
depreciation of ringgit Malaysia is mostly due to other external factors. Following the strengthening of
US dollar, Malaysia ringgit is unlikely to fare well against greenback in the
present. The ringgit of Malaysia’s depreciation would cause the prices
of goods and services are expected to rise, the cost of goods and services
increased, people will feel that are expensive and unable to cover its cost. As
a price level increases, the quantity of goods and services demanded decreases.
As a result, we can only buy a little thing by using our money so our
purchasing power is reduced.

The Aggregate-Demand Curve :

 

 

 

 

 

 

 

 

 

 

 

Besides that,
the cost of imported goods and services will rise because Malaysia ringgit has facing
depreciation. The use of
raw materials from foreign markets will also contribute to inflation caused by
imported goods. As a result, local manufacturers are forced to sell the
price of goods to be higher to support the cost of operation. The seller will
sell the higher price on the finished goods to the consumers in the market
while the Malaysia ringgit is shaky. A weak of Malaysia ringgit will cause more
export because the foreigner buys Malaysian-made goods in a cheaper price. Malaysia
will generate more profits and revenue when the demand of domestic products is
increasing. As a whole, the
increment in exports for some economic sectors will be observed.
Moreover, Malaysia will increase the foreign investment as the ringgit is
depreciated.

Thus, a
depreciation of Malaysia ringgit will motivate foreigners to invest their money
through Foreign Direct Investment (FDI) and Foreign Investment portfolio to
have a cheaper price to utilize and purchase bonds and stocks in Malaysia
severally. While the
effects of capital flow generated by foreign investment portfolio is not
immediately felt by the citizens, FDI can generate employment opportunities in
the market as multinational companies build new facilities to conduct
businesses in the country. In the economy, it will have currency
fluctuation to each other. In conclusion, if the price of goods and services
increase but income is not, so diminished purchasing power would happen. The
solution to solve this problem is Bank Negara should carry more measures to
boost our Malaysia Ringgit currency containing looking at the possibility of
raising the interest rate by half a point. By raising the interest rate, more
money will be parked in our country. People who used to get low interest rates
in US will move their money to our local banks.

 

 

 

Analysis of Mida sees 7,000 job creation at job fair

From this
article about Mida sees 7,000 job creation at job fair, The Malaysian
Investment Development Authority (Mida) expects to create more than 7,000 job
opportunities through its ‘Mida Open Day’ today. To reduce the unemployment in
Malaysia, MIDA take some initiative to create a job fair with received about 56
companies’ participation to exhibit at the job fair, which in turn would
provide vacancies in various levels of positions. The response from the 56
companies is an encouragement for MIDA to conduct this job fair. Besides that,
MIDA have government-linked companies (GLCs), multinational and local companies
as well so that they have many possibilities to reduce unemployment problems in
Malaysia. As they planned, they conducted the job fair successfully.

Majority of
the job seekers are fresh graduates (80 per cent) and experienced candidates
(20 per cent). Companies are also looking for experienced candidates,” he said,
adding that the Mida Open Day was a good avenue for those looking for better
employment. Mohamad Ismail
who is director of industry talent management & expatriate division was
concerned about the rate of employment and would look at whether the job fair
fulfills the companies’ employ ability requirements.

The
employment rate is also an important factor for the economic environment in a
country. The major problem of unemployment is usually divided into two
categories, the long-run problem and the short-run problem in natural and
cyclical rate of unemployment. The natural rate of unemployment is unemployment
that does not go away on its own even in the long run. It is the amount of
unemployment that the economy normally experiences. Cyclical unemployment
defines the year-to-year fluctuations in unemployment around its natural rate.
It is associated with short-term ups and downs of the business cycle. So for
Malaysian Investment Development Authority (MIDA) slightly decrease every year.
In order to reduce the cyclical unemployment rate the organization-mingle with
government- linked companies and multinational and local companies in Malaysia.
Most of the manufacturing company such as Honda Malaysia, Nestle manufacturing
company looking for fresh graduates to fulfil their companies managerial level
jobs, senior manager, executives and supporting staffs’ positions. MIDA plays
an important role to find employees for those companies. So, this event is a
very good platform for job seekers and companies to find candidates that suit their
manufacturing companies’ job requirements. If the employees are suits for the
job requirements the companies will hire them.

Besides that, Mida
was concerned about the rate of employment and would look at whether the job
fair fulfills the companies’ employ ability
requirements.
MIDA also includes Maybank,
CIMB, Sime Darby and Malaysia Airlines, to be offered in this programme. These companies would train graduates for eight to 10 months on soft
skills He said companies should provide longer-term industrial
training to graduates to minimise
the unemployment rate. After that, the employees have optional to work in
that company or can go for other companies to seek jobs according to their
basic skills and experience of industrial training. This may help MIDA to
reduce the natural unemployment rate in the economic environment.

 In conclusion, not all the
countries can develop the unemployment rate at 0%. Also in Malaysia, the lower
the unemployment rate, the more the country can be stabilized in sustainable economic
environment. MIDA has responsibility to maintain the level of unemployment rate
in Malaysia. Although it would not be help to create a big different in
Malaysia’s economic but at least MIDA can play a small role to stabilize the
unemployment rate in Malaysia. Because of this, not only Malaysia will
economically stable also MIDA company leads to be top 50 companies in Malaysia
with low unemployment rate. Such as an Example the unemployment rate of MIDA in
2016 is 3.19% decreased 1.0% which is 2.19% in 2017. This shows MIDA company’s
take serious action and consideration towards unemployment rate. The job fair
is one of the ways to reduce unemployment of MIDA company in Malaysia to create
a sustainable and strategic economic environment.

 

 

 

Analysis of Good GDP growth:
Economy is in stronger position

Introduction

According to
the article published by New Straits Times on the 30th of August 2017,
Malaysia’s economy, as measured by gross domestic product (GDP), grew 5.8% in
2017’s second quarter (2Q) from a year earlier, on domestic demand and export growth.
In the month of April to June, Malaysia’s gross domestic product (GDP) has
expanded and the best performance since the first quarter of 2015. The
statistics department also said Malaysia’s economy remained its uptrend
momentum since second quarter 2016. GDP grew at 5.8 per cent with a value of
RM287.2 billion at constant prices and RM 329.5 billion at current prices.

Analysis

Figure 1

Figure 1
shows the statistics of GDP from January 2015 to September 2017. The most
obvious feature of these data is that real GDP grows over time. The real GDP of
Malaysia in 2017 was more than 1 and half times its 2016 level. This continued
growth in real GDP enables the typical Malaysian to enjoy greater economic
prosperity than his or her parents and grandchildren did.

A second
feature of the GDP data is that growth is not steady. The upward climb of real
GDP is occasionally interrupted by periods during which GDP declines, called
recessions. Recessions are associated not only with lower incomes but also with
other forms of economic distress like rising unemployment, falling profits,
increased bankruptcies and many more.

The GDP
deflator is a measure of the price level calculated as the ratio of nominal GDP
to real GDP times 100. It tells us what part of the rise in nominal GDP that is
attributable to a rise in prices rather than a rise in the quantities produced.
Nominal GDP reflects both prices of goods and services and the quantities of
goods and services the economy is producing. By contrast, by holding prices
constant at base-year levels, real GDP reflects only the quantities produced.
From these two statistics, we can compute a third, called the GDP deflator,
which reflects the prices of goods and services but not the quantities
produced.

GDP deflator =

                                                                 Real
GDP=

Conclusion

The aggregate-demand curve tells us the quantity of all goods and
services demanded in the economy at any given price level. As figure 3
illustrates, the aggregate-demand curve is downward sloping. This means that,
other things equal, a decrease in the economy’s overall level of prices (from
P1 to P2) raises the quantity of goods and services demanded (from Y1 to Y2). A
fall in the price level from P1 to P2 increases the quantity of goods and
services demanded from Y1 to Y2. There are three reasons for this negative
relationship. As the price level falls, real wealth rises, interest rates fall,
and the exchange rate depreciates. These effects stimulate spending on
consumption, investment, and net exports. Increased spending on any or all of
these components of output means a larger quantity of goods and services
demanded.

Figure 3

 

Analysis of Interest Rate Hike Could Boost Bank Earnings

            Interest rate is the amount charged, expressed as a percentage of
principal, by a lender to a borrower for the use of assets. Interest rates are
generally noted on an annual basis, known as the Annual Percentage Rate (APR).
It allows us to compare the cost or value of different borrowing choices. APR
is an annualized rate, which means it tells us how much interest we will pay if
we borrow for one full year. Cash, consumer goods, and large assets such as
vehicle or building are the assets borrowed. Everyone can lend money and charge
interest, but it is usually banks. Borrowers will be charged by banks a little
higher interest rate than they pay depositors so that they can get profit.

              Interest rate is applied to the
total unpaid part of the loan or credit card balance. It is important to know
the interest rate charged in our outstanding debts. If the borrower pay less
than the interest rate, his debts will increase even though he is making payments.
Banks will charge higher interest rate, if there is a lower chance for the
borrower to repay back the debts. Other than that, banks normally charge higher
interest rate for credit cards. This is because credit cards are hard to
manage.

              There are a lot of situations
where lending and borrowing is occurred. For examples, individuals will borrow
money to purchase houses, fund projects, start businesses, pay college fees and
more. Businesses take loans to raise capital projects and develop their
operations by purchasing fixed and long terms assets such as land, buildings,
machinery, trucks and others. The money to be repaid usually more than the
borrowed amount because the banks want to be reimbursed for their loss of use
of the money during the period that the funds are loaned out.

             Next, interest rate changes do
affect the profitability of the banking sector. When the interest rate
increases, it is directly increases the yield on this cash, and the proceeds go
directly to earnings. Higher interest rates give benefits to brokerages,
commercial banks and regional banks.

From the reports of The Star titled interest rate hike could boost
bank earnings, it is stated that AmInvestment Research said it is forecasting
one or two raises of 25bps (basis points) in Bank Negara Malaysia’s overnight
policy rate in 2018 that will cause mildly positive on banks’ earnings.
Overnight rate is the interest rate the central bank (Bank Negara Malaysia)
sets to target monetary policy. Monetary policy involves management of money supply
and interest rate, and also is a demand side economic policy used by the
government to attain macroeconomic target such as inflation, consumption,
growth and liquidity.

              There are two categories of banks
assets. First, earning assets. It means those on which banks earns interest
income. Second, non-earning assets, that is those which are used for the reason
of reserve requirement, fixed assets to run day to day operational activities. The
adaptation of 25 to 50bps in the overnight policy rate in 2018, normalising the
standard interest rate to 3.50%. It is stated that the sharp increase of
interest rate will have a temporary positive impact on banks’ net interest
income as banks’ loan rates will be repriced higher. A 25bps increase in the
interest rate could increase banks’ net profit by 0.9% to 2.4%.

              From the diagram, as interest
rates increase, profitability on loans also increases, as there is larger
spread between the federal funds rate and the rate bank charges its borrowers. When
interest rates increase, there are real world impacts on the ways that
consumers and businesses can access credit to make necessary purchases and plan
their finances. The spread between long-term and short-term rates also enlarge
during interest rate hikes. This is because the long-term rates tend to increase
faster than short-term rates.

              From the article, it is said that
the extent to benefits to earnings will depend on the percentage of floating
rate loans. This is an interest rate that moves up and down with the rest of
the market or along with an index. Second, it is also depend on percentage of
domestic to total loans well as the timing of the rate hike relative to the
banks’ FYE.

              If compared with other
institutions, banks are more sensitive to interest rate changes. The impact of
interest rate changes on bank earnings has been a crucial issue for banking
system. The bank interest income is remarkably affected by the interest rate,
investments and loan and advances. The earnings of the bank is depends on
interest rate that is the tool of monetary policy. Interest rate is importantly
related to interest income, investments and loans and advances.

              In conclusion, when interest rates
rise, that is typically good news for the profitability of the banking sector.
However, for the of the global business sector, a rate hike carves into
profitability.

 

 

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