Laman Utama Berita Terkini Kewangan Importance of household spending
Importance of household spending PDF Print E-mail
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Thursday, 07 September 2017 08:58


The importance of private consumption or the total spending on consumption goods and services by households in the country continues to rise, especially since the global crisis nearly a decade ago.


The household consumption share of gross domestic product (GDP), which accounted for slightly more than half of the country’s GDP last year, has been charting a steady rise over two economic downturns from 45 per cent in 2009 and 41 per cent in 1998.


Paradoxically, the current GDP share of household expenditure is lower than in the early decades. It was averaged 60 per cent of GDP in the sixties and 54 per cent in the seventies and eighties.


The high GDP share of household spending during Malaysia’s low to lower middle-income stage mirrors the share for countries in the low- and middle-income categories. Currently, the GDP share of household spending in low-income countries hovers close to 80 per cent.


Those in the middle-income category was around 54 per cent while high-income countries averaged 60 per cent, according to World Bank data available from 1960 onwards.


More interestingly, being an upper middle-income country since the early nineties, Malaysia’s household spending as a proportion of GDP had trailed the average for upper middle-income countries until recently.



It rose above the average for the group in 2013 with the margin widening from 1.5 percentage points to 3.7 percentage points in 2015. By 2016, Malaysia’s household consumption share to GDP at 55 per cent has inched closer to the average of 60 per cent for high-income economies.

Higher growth and lower low volatility.


Since 2000, except for two years in 2010 and 2002, the rate of increase in household spending has exceeded that of the economy. Its growth averaged eight per cent per annum during the post-Asian Financial Crisis period from 2000-2007 and eased slightly to 6.9 per cent during the post-global financial crisis period from 2010 to last year.


During both periods, the average household consumption growth exceeded average annual GDP growth of six per cent and 5.4 per cent by 1.5 and 2 percentage points, respectively. With its rising share, household spending accounted for 58 per cent of the country’s growth in earlier period. Its contribution rose further to 66 per cent in the post-global crisis period.


The sizeable contribution affirms the increasingly important role of household spending in supporting growth much like the situation in advanced economies.


Of the various demand components that include private investment, government spending, exports and imports, household expenditure is also the least volatile.


Besides contributing to growth, its resilience is also essential to ensuring stable growth and withstanding external shocks, such as a recession in the advanced economies or a fall in world commodity prices.


Contributing factors


Besides rising income, the other factors underlying the steady expansion of household spending include the country’s increase in working age population and the corresponding household formation, employment growth, low and relatively stable inflation and wider access to financing as evidenced by the broadening and deepening of the banking and capital market system.


Other factors that could have contributed to the stable consumption trend include the widening reach of safety nets, such as life and medical insurance and the growing size of the civil service, where job security enhances the confidence of banks and cooperatives to lend to civil servants and for them to spend.


Other contributing factors include the country’s demographic dividend in the form of a young and growing population and lifestyle changes brought about by urbanisation. The rise of consumerism, increased penetration of shopping malls and e-commerce could have also contributed to the uptrend in household spending.


Gathering headwinds


A well-publicised headwind is rising household indebtedness. Although the high debt level does not cause a decline in household spending, it constrains growth as well as makes households more vulnerable to changes in the economic and financial conditions, such as job lay-offs, inflation and interest rate increases.


Another headwind is the disproportionately large number of low-income households despite the steady rise in overall income and the middle-class segment.


The efficacy of direct income transfers by the government to more than two million households out of a total of over six million households in spurring consumption attests to limits to spending by the low-income households besides the longer term risk of inadequate savings.




Despite the headwinds constraining household consumption from hitting the trend growth of seven to eight per cent, household expenditure is projected to sustain a robust expansion of more than six per cent this year and next year on the back of improving income and employment prospects and continuing credit flows.


This augurs well for the short-term outlook of the retail and wholesale sector and the gamut of consumer-oriented industries.


Over the longer term, the continuing expansion of household spending to the level seen in advanced economies will depend crucially on expanding income and job opportunities especially for households in the government’s income transfer programme.


Further reducing the income tax burden to raise the spending power of the middle-income households in particular will be another way to strengthen the resilience of household spending.


The writer is the Professor of Economics at Sunway University Business School and Director of Economic Studies Programme at Jeffrey Cheah Institute on Southeast Asia at Sunway University. He is also an external member of Bank Negara Malaysia’s Monetary Policy Committee. The views expressed in the article are his own.





Source : 6 September / New Straits Times


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