Macroeconomics Analysis

Analysis of Higher food, Fuel costs push up November inflationInflation is an indicator of the economic wealth of a country. Theinflation rate is used to measure the rate of change in overall price level ofgoods and services that we consume.

To calculate inflation of a country, theConsumer Price Index (CPI) is used in most of the countries. CPI measuresinflation by calculating the price change in consumer goods and services fromthe perspective of consumers. According to the article published by The Star on 20thDecember 2017, titled “Higher food, Fuel costs push up November inflation”, theinflation rate or CPI for November 2017 rose 3.4% from a year ago. TheStatistics Department said that based on seasonally adjusted term, the overallCPI for November increased 0.7% as compared to October. Core inflation rose2.2% in November versus a year ago.

In this news article, the inflation iscaused due to higher transport and food costs, which is also called ascost-push inflation. The cost-push inflation happens when the demand for goodsincreases due to the prices increase where fewer goods can be produced toprotect profit margins. There are many reasons why costs might rise:a)     Component costs. Forexample, an increase in the prices of raw materials and other components. b)     Rising labour costs.

It is causedby wage increases. Wage costs often rise when unemployment is low becauseskilled workers become scarce. Wages increase when people expect higherinflation so the workers ask for more wages to protect their real incomes. c)      Expectations of inflation.

When the pricesof goods and services increase, the people get concerned about the effects ofinflation 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 toan 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 (atwhatever level of demand) to increase prices well above costs.

                       Besides the cost-push inflation, demand –pull inflation is alsoanother type of inflation. It occurs when the economy demands more goods andservices than are available. When there is excess demand, producers can raisetheir prices and achieve bigger profit margins. There are several causes ofdemand-pull inflation:- a)     A depreciation of the exchange rate. It increases the price of imports and reduces the foreign priceof a country’s exports. If consumers buy fewer imports, while exports grow, ADcurve in Malaysia will rise – and there may be a multiplier effect on the levelof demand and output. b)     Higher demand from a fiscal stimulus.

If direct taxes are reduced, consumers have more disposable incomecausing demand to rise and higher government spending also causes higherdemand.           In conclusion, if the inflation is too high, it is not good forthe economy and individuals because inflation always reduce the value of money.Therefore, we have to solve the inflation problem.

Firstly, the monetary policycan be used to reduce inflation by increasing interest rate which helpsreducing the growth of aggregate demand. The lower aggregate demand willdecrease the inflation in economy. Secondly, the fiscal policy also can be usedto solve inflation. The government should increase tax and reduce the governmentspending which can decrease the growth of aggregate demand. Analysis of Ringgit slips against USD as Fed turns HawkishAn exchangerate means that the price of a nation’s currency in terms of another currency.

Currencyis 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 foreigncurrency. Moreover, exchange rates can also be quoted against another country’scurrency, are called as cross currency or cross rate. An exchange rate includesa base currency and a quote currency. Based on thearticle “Ringgit slips against USD as Fed turns hawkish” from The Star Online,it states that the ringgit depreciated against the US dollar today (From1USD=RM3.96 to 1USD=RM3.95).

The demand and supply information from thequantity of money RM is show by the graph below. The vertical axis shows theexchange rate for Malaysia rate, which is measured in U.S dollars. Once theMalaysia Ringgit depreciated, demand of RM decrease, demand curve shiftleftward. Then, the exchange rate declines, and quantity of RM will decrease.

         For further discussion, thedepreciation of ringgit Malaysia is mostly due to other external factors. Following the strengthening ofUS dollar, Malaysia ringgit is unlikely to fare well against greenback in thepresent. The ringgit of Malaysia’s depreciation would cause the pricesof goods and services are expected to rise, the cost of goods and servicesincreased, people will feel that are expensive and unable to cover its cost. Asa 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 ourpurchasing power is reduced. The Aggregate-Demand Curve :           Besides that,the cost of imported goods and services will rise because Malaysia ringgit has facingdepreciation. The use ofraw materials from foreign markets will also contribute to inflation caused byimported goods.

As a result, local manufacturers are forced to sell theprice of goods to be higher to support the cost of operation. The seller willsell the higher price on the finished goods to the consumers in the marketwhile the Malaysia ringgit is shaky. A weak of Malaysia ringgit will cause moreexport because the foreigner buys Malaysian-made goods in a cheaper price. Malaysiawill generate more profits and revenue when the demand of domestic products isincreasing.

As a whole, theincrement in exports for some economic sectors will be observed.Moreover, Malaysia will increase the foreign investment as the ringgit isdepreciated. Thus, adepreciation of Malaysia ringgit will motivate foreigners to invest their moneythrough Foreign Direct Investment (FDI) and Foreign Investment portfolio tohave a cheaper price to utilize and purchase bonds and stocks in Malaysiaseverally. While theeffects of capital flow generated by foreign investment portfolio is notimmediately felt by the citizens, FDI can generate employment opportunities inthe market as multinational companies build new facilities to conductbusinesses in the country.

In the economy, it will have currencyfluctuation to each other. In conclusion, if the price of goods and servicesincrease but income is not, so diminished purchasing power would happen. Thesolution to solve this problem is Bank Negara should carry more measures toboost our Malaysia Ringgit currency containing looking at the possibility ofraising the interest rate by half a point. By raising the interest rate, moremoney will be parked in our country.

People who used to get low interest ratesin US will move their money to our local banks.    Analysis of Mida sees 7,000 job creation at job fairFrom thisarticle about Mida sees 7,000 job creation at job fair, The MalaysianInvestment Development Authority (Mida) expects to create more than 7,000 jobopportunities through its ‘Mida Open Day’ today. To reduce the unemployment inMalaysia, MIDA take some initiative to create a job fair with received about 56companies’ participation to exhibit at the job fair, which in turn wouldprovide vacancies in various levels of positions. The response from the 56companies is an encouragement for MIDA to conduct this job fair. Besides that,MIDA have government-linked companies (GLCs), multinational and local companiesas well so that they have many possibilities to reduce unemployment problems inMalaysia.

As they planned, they conducted the job fair successfully.Majority ofthe 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 betteremployment.

Mohamad Ismailwho is director of industry talent management & expatriate division wasconcerned about the rate of employment and would look at whether the job fairfulfills the companies’ employ ability requirements. Theemployment rate is also an important factor for the economic environment in acountry. The major problem of unemployment is usually divided into twocategories, the long-run problem and the short-run problem in natural andcyclical rate of unemployment. The natural rate of unemployment is unemploymentthat does not go away on its own even in the long run.

It is the amount ofunemployment that the economy normally experiences. Cyclical unemploymentdefines 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 forMalaysian Investment Development Authority (MIDA) slightly decrease every year.In order to reduce the cyclical unemployment rate the organization-mingle withgovernment- linked companies and multinational and local companies in Malaysia.Most of the manufacturing company such as Honda Malaysia, Nestle manufacturingcompany looking for fresh graduates to fulfil their companies managerial leveljobs, senior manager, executives and supporting staffs’ positions.

MIDA playsan important role to find employees for those companies. So, this event is avery good platform for job seekers and companies to find candidates that suit theirmanufacturing companies’ job requirements. If the employees are suits for thejob requirements the companies will hire them. Besides that, Midawas concerned about the rate of employment and would look at whether the jobfair fulfills the companies’ employ abilityrequirements.

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 softskills He said companies should provide longer-term industrialtraining to graduates to minimisethe unemployment rate. After that, the employees have optional to work inthat company or can go for other companies to seek jobs according to theirbasic skills and experience of industrial training. This may help MIDA toreduce the natural unemployment rate in the economic environment.

 In conclusion, not all thecountries can develop the unemployment rate at 0%. Also in Malaysia, the lowerthe unemployment rate, the more the country can be stabilized in sustainable economicenvironment. MIDA has responsibility to maintain the level of unemployment ratein Malaysia. Although it would not be help to create a big different inMalaysia’s economic but at least MIDA can play a small role to stabilize theunemployment rate in Malaysia. Because of this, not only Malaysia willeconomically stable also MIDA company leads to be top 50 companies in Malaysiawith low unemployment rate.

Such as an Example the unemployment rate of MIDA in2016 is 3.19% decreased 1.0% which is 2.19% in 2017. This shows MIDA company’stake serious action and consideration towards unemployment rate.

The job fairis one of the ways to reduce unemployment of MIDA company in Malaysia to createa sustainable and strategic economic environment.   Analysis of Good GDP growth:Economy is in stronger positionIntroduction According tothe 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% in2017’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) hasexpanded and the best performance since the first quarter of 2015. Thestatistics department also said Malaysia’s economy remained its uptrendmomentum since second quarter 2016. GDP grew at 5.8 per cent with a value ofRM287.

2 billion at constant prices and RM 329.5 billion at current prices.Analysis Figure 1Figure 1shows the statistics of GDP from January 2015 to September 2017. The mostobvious feature of these data is that real GDP grows over time. The real GDP ofMalaysia in 2017 was more than 1 and half times its 2016 level.

This continuedgrowth in real GDP enables the typical Malaysian to enjoy greater economicprosperity than his or her parents and grandchildren did.A secondfeature of the GDP data is that growth is not steady. The upward climb of realGDP is occasionally interrupted by periods during which GDP declines, calledrecessions. Recessions are associated not only with lower incomes but also withother forms of economic distress like rising unemployment, falling profits,increased bankruptcies and many more. The GDPdeflator is a measure of the price level calculated as the ratio of nominal GDPto real GDP times 100. It tells us what part of the rise in nominal GDP that isattributable 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 ofgoods and services the economy is producing. By contrast, by holding pricesconstant 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 quantitiesproduced.

GDP deflator =                                                                 RealGDP= Conclusion The aggregate-demand curve tells us the quantity of all goods andservices demanded in the economy at any given price level. As figure 3illustrates, the aggregate-demand curve is downward sloping. This means that,other things equal, a decrease in the economy’s overall level of prices (fromP1 to P2) raises the quantity of goods and services demanded (from Y1 to Y2). Afall in the price level from P1 to P2 increases the quantity of goods andservices demanded from Y1 to Y2.

There are three reasons for this negativerelationship. As the price level falls, real wealth rises, interest rates fall,and the exchange rate depreciates. These effects stimulate spending onconsumption, investment, and net exports. Increased spending on any or all ofthese components of output means a larger quantity of goods and servicesdemanded.

Figure 3 Analysis of Interest Rate Hike Could Boost Bank Earnings            Interest rate is the amount charged, expressed as a percentage ofprincipal, by a lender to a borrower for the use of assets. Interest rates aregenerally 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.

APRis an annualized rate, which means it tells us how much interest we will pay ifwe borrow for one full year. Cash, consumer goods, and large assets such asvehicle or building are the assets borrowed. Everyone can lend money and chargeinterest, but it is usually banks. Borrowers will be charged by banks a littlehigher interest rate than they pay depositors so that they can get profit.              Interest rate is applied to thetotal unpaid part of the loan or credit card balance.

It is important to knowthe interest rate charged in our outstanding debts. If the borrower pay lessthan 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 theborrower to repay back the debts.

Other than that, banks normally charge higherinterest rate for credit cards. This is because credit cards are hard tomanage.              There are a lot of situationswhere lending and borrowing is occurred. For examples, individuals will borrowmoney to purchase houses, fund projects, start businesses, pay college fees andmore. Businesses take loans to raise capital projects and develop theiroperations by purchasing fixed and long terms assets such as land, buildings,machinery, trucks and others.

The money to be repaid usually more than theborrowed amount because the banks want to be reimbursed for their loss of useof the money during the period that the funds are loaned out.             Next, interest rate changes doaffect the profitability of the banking sector. When the interest rateincreases, it is directly increases the yield on this cash, and the proceeds godirectly 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 boostbank earnings, it is stated that AmInvestment Research said it is forecastingone or two raises of 25bps (basis points) in Bank Negara Malaysia’s overnightpolicy 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 supplyand interest rate, and also is a demand side economic policy used by thegovernment to attain macroeconomic target such as inflation, consumption,growth and liquidity.              There are two categories of banksassets. First, earning assets.

It means those on which banks earns interestincome. Second, non-earning assets, that is those which are used for the reasonof reserve requirement, fixed assets to run day to day operational activities. Theadaptation of 25 to 50bps in the overnight policy rate in 2018, normalising thestandard interest rate to 3.50%. It is stated that the sharp increase ofinterest rate will have a temporary positive impact on banks’ net interestincome as banks’ loan rates will be repriced higher.

A 25bps increase in theinterest rate could increase banks’ net profit by 0.9% to 2.4%.              From the diagram, as interestrates increase, profitability on loans also increases, as there is largerspread between the federal funds rate and the rate bank charges its borrowers. Wheninterest rates increase, there are real world impacts on the ways thatconsumers and businesses can access credit to make necessary purchases and plantheir finances. The spread between long-term and short-term rates also enlargeduring interest rate hikes. This is because the long-term rates tend to increasefaster than short-term rates.

              From the article, it is said thatthe extent to benefits to earnings will depend on the percentage of floatingrate loans. This is an interest rate that moves up and down with the rest ofthe market or along with an index. Second, it is also depend on percentage ofdomestic to total loans well as the timing of the rate hike relative to thebanks’ FYE.              If compared with otherinstitutions, banks are more sensitive to interest rate changes. The impact ofinterest rate changes on bank earnings has been a crucial issue for bankingsystem. The bank interest income is remarkably affected by the interest rate,investments and loan and advances.

The earnings of the bank is depends oninterest rate that is the tool of monetary policy. Interest rate is importantlyrelated to interest income, investments and loans and advances.              In conclusion, when interest ratesrise, that is typically good news for the profitability of the banking sector.However, for the of the global business sector, a rate hike carves intoprofitability.

  

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