Are Malaysians Enjoying Higher Living Standards Today or Worse Off Compared to Yesteryears?

The span of the past three weeks saw the publication of two articles in the news, concerning the living standard and quality of life of Malaysians, which seemed to represent two different quality of life trends. The first article more recently published reported that Malaysians are now enjoying much higher living standards, based on higher consumption of non-essential goods and services (ref. The Star Online: Tuesday, 12 December 2017); whereas the second article reported that the majority of Malaysians do not feel that that their standard of living has improved, based on a national public opinion survey (ref. Malay Mail Online: Friday, 24 November 2017).

While the context of both articles were set differently, the conclusions reached can and should certainly be compared. Whether one trend is more realistic than the other carries significant impact for businesses and government organizations, as well as determining the direction of strategies and development to be implemented. It is also interesting to examine whether the general sentiment of Malaysians on the ground about the concern for the nation’s economy is substantiated.

Malaysians today are consuming more goods and services than they were 6 years ago.

Adopting a less refined measurement of living standard as a starting point, the living standard of Malaysians have indeed improved, based on the increased household expenditure across a basket of goods as captured by the national Household Expenditure Survey 2016 (ref. Department of Statistics Malaysia). Malaysians, on average, are spending (and consuming more) across all types of essential and non-essential goods and services in 2016 than they were in 2010. This is still true even after adjusting household expenditure spending for inflation and consumer price increases (ref. Fig. 1). What this means is that Malaysians today are able to afford more necessities and luxuries of life than they were able to in 2010. As rightfully pointed out in the first article, Malaysians are indeed eating out more often today than they were in 2010.

The consumption of the average Malaysian has, indeed, increased over the past 6 years (since 2010), given that the effect of price increase accounted for just 17% out of the total household expenditure increase of 84%.
Fig. 1: Growth of Household Expenditure Index and Consumer Price Index, 2010 to 2016 (2010=100).

However, this is just one snapshot of the entire picture. A better measurement of living standard must account for the level of disposable income as well. (The level of disposable income is defined as the balance of gross income after subtracting expenditure commitments for essential items.) Relatively speaking, eating out more won’t translate much to higher living standards if that’s all their disposable income can afford.

Malaysians today have less disposable income than they had 6 years ago: but why?

One common misperception of what leads to lesser disposable income is that consumer prices are rising faster than gross income. This explanation, while reasonable, is again just one snapshot of the entire picture. From 2016 to 2010, the average household income increased by 73%; within the corresponding period, consumer prices have increased by just 17% (as at December 2016); in fact, average household income grew slightly faster than consumer prices from 2010 to 2016 (ref Fig. 2). Judging by this metric alone and with all things being equal, disposable income of Malaysians ought to be rising, not decreasing.

Average household income of Malaysians have increased at a slightly faster clip compared to consumer prices, from 2010 to 2016. But this is insufficient to describe the disposable income situation of Malaysians.
Fig. 2: Growth of Household Income Index and Consumer Price Index, 2010 to 2016 (2010=100).

Most of the increase in gross household income are being committed to essential items, so much so that they are “eating” into disposable income.

A more important key to measuring the level of disposable income is to consider where and in what proportion the household income is being spent, in conjunction with rising consumer prices. Breaking down the household expenditure into its categories of essential and non-essential goods and examining the consumption trends (initially) show that the consumption of non-essential goods has grown more compared to the consumption of essential goods between 2010 and 2016 (ref. Fig. 3).

An categorical analysis of household expenditure taken at face value initially shows that consumption of non-essential items have grown more compared to consumption of essential items; however…
Fig. 3: Categorical Index of Household Expenditure to Total Household Expenditure, 2016 (2010=100).

However, since increased consumption can be impacted by increase in consumer prices as well as increase in quantity consumed, the true consumption trends can be obtained by adjusting for consumer price increases. A different picture emerges after the adjustment: the true consumption of essential goods have grown more compared to non-essential goods, particularly in apparels; utilities; household maintenance, items, and appliances; and health (ref. Fig. 4 & 5). In other words, monthly household commitments for average Malaysians have increased at a rate that is greater than their disposable income.

…after removing the effects of inflation, or increase in consumer prices, from consumption, the categorical analysis shows that consumption of essential items have grown more, hence reducing the level of disposable income.
Fig. 4: Categorical Index of Household Expenditure to Total Household Expenditure, Adjusted for Increase in Consumer Prices, 2016 (2010=100).

Taking the effects of price increase out of the equation, Malaysians have less to spend on non-essential items after having to spend more on essential items, which contributes to the experience of worsening living standards.
Fig. 5: Average Household Expenditure Index of Essential and Non-Essential Items, Adjusted for Increase in Consumer Prices, 2016 (2010=100).

In addition, the slower growth of household income compared to household expenditure squeezes the pockets further.

One common question frequently posed in most discussions on the topic of living standards is whether Malaysians are being overly negative of their disposable income situation today, because as we have seen at the beginning of this article, Malaysians in 2016 are able to afford more (and indeed consuming more) necessities and luxuries in general compared to Malaysians in 2010. How high does the benchmark of “satisfaction” lie?

The answer to that depends on the individual lifestyle preferences in question, and probably not very helpful for the purpose of planning. What business and organizational leaders ought to be paying attention to is the average lifestyle (or normal lifestyle) of the typical Malaysian, which also forms the context of this article. In this context, the lifestyle preferences of the typical Malaysian is the benchmark of “satisfaction” and makes a satisfactory benchmark as well.

The gap between average household income and total household expenditure has been increasing over the past two decades: Malaysians’ income supporting the average lifestyle is not growing fast enough.
Fig. 6: Growth of Household Income Index and Household Expenditure Index, 1994 to 2016 (2010=100).

With this average lifestyle in mind, it is not surprising that most Malaysians do not feel that their living standards have improved as per the national public opinion survey reported in the second article. Over the past half a decade, the average household income of Malaysians supporting the average lifestyle has lagged behind their household expenditures (ref. Fig. 6). Compounding this with the fact that monetary commitments on essential items have become heavier (again, in the context of the average lifestyle), the effects of tightening pockets and “the ringgit getting smaller” are experienced more pronouncedly.

Conclusion: Key Takeaways for Businesses and Government Organizations.

The average Malaysian today is experiencing a shrinking of disposable income relative to the disposable income levels enjoyed half a decade ago. This poses some interesting challenges for businesses, particularly businesses operating in B2C markets, as they head into 2018.

[1] Businesses need to be better at out-positioning their competition at meeting consumers’ needs.

As expenditure commitments for essential goods continue to rise, consumer spending will trend towards the thrifty side of the spectrum. Competing businesses will need to work harder to extract the same ringgit from consumers. Businesses will need to benchmarking their competition and understanding of the target market in much greater detail than before.

[2] Businesses need to deliver more value to consumers for the same ringgit.

As consumers contemplate more for every ringgit that they have, businesses can expect them to shop around more for the best deals. In 2018, more consumers will turn to e-commerce than previous years. Digital marketing is even more critical and efforts will need to be stepped up to capture and convert consumers online. In addition, businesses who have been competing the same way for years will need to innovate, with the aim of delivering more value to consumers for the same ringgit.

[3] Businesses can look to deliver savings on essential expenditure.

Any savings on essential expenditures on the part of consumers will translate to increased disposable income for them. Non-traditional partnerships with organizations in the health, home, utilities, and apparel related sectors, for example, may turn out to be great value generators in the eyes of consumers. If viable partnerships exist, ensure that marketing operations are able to deliver the message to target consumers, on-point.

Heading into 2018, government and government agencies should now double down on programs and initiatives aimed at increasing household income growth, with the objective of outpacing household expenditure growth. A good spearhead initiative is to double down on efforts to increase salary growths across all occupations, and this should be achieved by assisting businesses to increase their productivity in even more impactful ways. Significant redesigns in the areas of jobs, education and skills, technology, and labour, particularly in manufacturing, agriculture, and construction as well as SME sectors, are critical to this transformation process.

While controlling for inflation is no less important, the cumulative effects are nevertheless in diminishing returns. For the past half a decade (and certainly for the past two decades), the gap between the growths of household income and household expenditure continue to widen for the average Malaysian, even when policies have favored cost control. A more sustainable way of improving the living standards of Malaysians is through raising household income levels; but the key takeaway here is how this should/could be done, such that the results surpass the level of progress that has been achieved thus far.

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