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NEWS UPDATES 
 11 Jan 2009

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Malaysia Economic Outlook 2009:
Domestic demand critical to growth

As the recession in advanced economies will set the tone for global economic outlook in 2009, the prospects for the Malaysian economy will to a large extent depend on the strength of the domestic demand, reported the Star daily.

The daily quoted the Malaysian Rating Corp Bhd’s chief economist Nor Zahidi Alias as saying that the Malaysian government will remain vigilant and keep a close watch on how the global economy, particularly the US, evolves owing to the correlation between the U.S. and Malaysian economy.

“The last time when the US succumbed to a recession in 2001, Malaysia’s growth almost screeched to a halt. We do not anticipate a quick recovery for the US economy as lethargic consumer sentiment will magnify weak business conditions. At the same time, we expect poor macro visibility to persist for Asian economies in 2009,” Nor Zahidi said.

MARC does not foresee the global economy plunging into a depression, as central banks around the world have been able to avoid the major mistake of restricting money supply that was made during the Great Depression in the 1930s, and with the strenuous efforts being made by the US government and the Fed to prevent the world’s largest economy from a total collapse.

With huge stimulus packages and a Zero Interest Rate Policy (ZIRP) being implemented in the US, a mild recovery can be expected at the end of 2009 or the early part of 2010, MARC noted, adding that despite this, it remains cautious as possible risks may emanate from the weaknesses of other major economies, particularly the Euro Zone and Japan.

“Given the circumstance, we are penciling in a 2.5 percent GDP growth as our base case for 2009 while anticipating a 0.5 percent expansion in our worst case scenario,” Nor Zahidi said.

According to MARC, the sustainability of domestic demand is the key assumption of its GDP forecast for 2009, in particular, the strength of private consumption will be a major factor in determining the overall performance of the economy over the next one year.

Should, for any reason, private consumption collapse in 2009, Malaysia’s GDP growth will drift away from MARC’s base case target of 2.5 percent. MARC anticipates a decline in the growth of private consumption to 4 percent in 2009 from an estimated 8.2 percent in the preceding year.

Private investment will remain vulnerable when growth deceleration starts to gain momentum, Nor Zahidi said as two major factors – deteriorating business sentiment as evidenced by the decline in MIER’s business conditions index and rising risk aversion among investors – could cause a sharp decline in private investment.

Based on past experience, volatility in private investment increased immensely during periods of economic uncertainty, he added, citing an example in 2001 when private investment plunged by -15.7 percent from an expansion of 32.6 percent in the preceding year when the economy suffered a mild recession.

Similarly, in 1998 during the Asian Financial Crisis, private investment contracted sharply by 55.2 percent compared with a 9.4 percent expansion in 1997.

As for 2009, MARC anticipates private investment to stagnate after posting a 6.5 percent growth in 2008.”

Being an open economy, Malaysia will likely bear the brunt of slumping global demand, particularly for electrical and electronic products, MARC noted.

Highlighting major indicators such as the semiconductor book-to-bill ratio which has remained below unitary level since February 2007 and are expected to remain lacklustre following the rapid declines in major economies in the US, Eurozone, and Japan.

With the global demand for PCs and cell phones expected to contract in 2009, Malaysia will likely experience a sharp decline in its exports of E&E products.

In addition, the downward pressure in export growth will also be magnified by sharp declines in prices of crude oil and crude palm oil, the country’s two major export commodities from record highs in 2008, despite some recent price gains on account of the tensed situation in Gaza.

With recession curbing the appetite for both commodities, MARC believes that real export will contract by 0.5 percent in 2009.

On inflation, as measured by the CPI, MARC expects it to taper off in the coming months, mainly because of slower increases in transportation index and weaker consumer demand, although food prices will remain at elevated levels as “sticky downward” phenomenon persists.

Going forward, inflation rate is expected to moderate to an average of 5.0 percent in the 1H09 following slower consumer demand.

MARC envisages, stating that in the 2H09, however, year-on-year growth in CPI will likely decline drastically as the base effect sets in, leading to an annual average of 3.5 percent in 2009 from an estimated 5.5 percent in 2008.





 

 

 

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