This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.

Bank Negara Malaysia’s recently released statistics report for February shows that there was a slowdown in M1 annual growth to 4.4% in January from 4.9% previously. Upon closer inspection, M1’s year-on-year (y-o-y) growth has been on a declining trend over the last year — likely owing to weaker private consumption.

M1 is a measure of money supply that the central bank defines as the amount of currency in circulation — notes and coins issued — plus current accounts.

The slower growth in M1 supply could be a reflection of weakening private consumption as cash is often a representation of consumers’ spending power. Simply put, the more cash consumers need for day-to-day purchases, the more is withdrawn from their savings account. Inversely, when consumers do not feel the need to spend, their cash generally stays in their savings account. Savings accounts are not a part of M1.

However, there are some who say that M1 does not provide a good indication of consumption as it does not take into account debit and credit cards as well as electronic payment systems that are gaining in popularity.

“I would look at it as weaker transactions within the domestic economy. It is something that suggests monetary supply is slowing down, which could have been caused by a combination of factors. To me, the slower growth of M1 is a reflection of what’s ongoing in the economy instead of a leading indicator,” says Hong Leong Investment Bank head of research and economist Sia Ket Ee.

“My view is that the conditions are not as negative anymore. I believe that we are almost reaching the bottom of the M1 slowdown,” he adds.

RHB Research economist Peck Boon Soon, who thinks that M1 is not a good indication of consumption because of its volatility, however points out that other commonly used indicators to measure private consumption have been showing a decline since the beginning of the year.

Bank Negara statistics show that loans approved and loans disbursed for households have been on a decline. Total loans approved for the household sector in January was RM14.07 billion but dipped 17% to RM11.65 billion in February. On a y-o-y basis, loans approved also slipped 23.8% in February.

Meanwhile, disbursement of loans also recorded a similar pattern. Loans disbursed for the household sector fell 14% in February to RM21.43 billion from the previous month’s RM24.93 billion. Disbursements in February fell 8.1% from a year earlier.

In February, even household loan applications declined 24% from January but fell a marginal 0.9% y-o-y.

The declining trend in consumption credit growth implies that consumers were unable to borrow to spend. In some ways, it may not be entirely bad as the country is being plagued by high household debt.

Other indicators like auto sales have also been disappointing. On a month-on-month basis, sales of passenger vehicles appear to be on a gradual decline. Year-to-February data released by the Malaysian Automotive Association shows a 0.83% decline from a year ago.

Also, the latest trade data shows import of consumption goods moderating to 17.9% y-o-y in February from 33.1% in January.

Sia opines that the best leading indicator for consumption is retail sales index, which is not available in Malaysia. He adds that loans extended to consumers and auto sales may not be reflective of day-to-day consumption.

“Consumers do become more cautious when economic conditions aren’t favourable, and they tend to shelve plans for big-ticket items. Yes, the pace of upgrading of cars and buying of new property has slowed, but that doesn’t include the ongoing consumption that is still being consumed,” he explains.

That said, many economists say that their private consumption growth forecasts are slightly less optimistic than Bank Negara’s projection of 5.1%. RHB’s Peck is one of them. “Household debt is still high, consumer sentiment is weak and the job market is weak as well. I do expect a slight recovery this year, but it will be quite weak,” he says.

United Overseas Bank economist Julia Goh has a more modest estimate for private consumption this year —between 4.5% and 4.8%.

“Bank Negara points out in its annual report that income growth is increasing but when you go around malls, the on-the-ground feel is that sentiment is not that great. There could be also a shift in spending towards necessities.”

“But I expect spending to improve towards the later part of this year, with the aid of cuts in the Employees Provident Fund [EPF] contribution rates and other measures to help middle-income households … which would increase disposable income,” says Goh.

During the last cut in EPF contribution rates, private consumption picked up quarter on quarter. She adds that whether or not there will be a similar pick-up in private consumption this time around depends on the current economic cycle.

Meanwhile, Sia takes the view that Bank Negara’s private consumption estimate is realistic because it could have factored in the measures taken to support disposable income, such as the cut in EPF contribution rates, civil servants’ wage hike and the minimum wage hike.

He adds that the unemployment indicator was still healthy at 3.4% in January. In advanced economies, unemployment rates shot up to double digits during an economic crisis, he highlights.

“I am slightly more positive on the second quarter onwards because of the measures taken by the government. Cash flow among consumers will be better and sentiments should improve as well,” Sia says.

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