Thursday, January 07, 2010

Malaysia GDP Growth Likely To Accelerate


A VOLATILE, bumpy ride it was for trade-dependent Malaysia as it received the knock-on effects of the global market.

The contractions have been reduced since last year's second quarter and the third quarter economic activities confirm Malaysia has passed the worst of the downturn that gripped its major trading partners.

Growth has shifted from the strong exports Malaysia to domestic demand, while various fiscal stimulus packages have been rolled out to kick-start the economy to mitigate the gradual recovery of the external markets.

Consumer and business confidence have rebounded in Malaysia as reflected in the third quarter gross domestic product (GDP) numbers.

Research houses have fine-tuned their GDP forecasts for 2009 and 2010 following the upside surprise in the third quarter when the economy posted a smaller decline of 1.2 per cent in the July-September period, compared with a 3.9 per cent decline in the second quarter and -6.2 per cent in the first quarter.

Except for agriculture, all the sectors recorded better performance in the third quarter.

CIMB chief economist Lee Heng Guie is already looking at a 2.0 per cent gain in the fourth quarter of 2009 which would take the growth to a lower contracted growth this year.

According to him, the latest batch of global and domestic indicators supports the view that the economy is firmly in a recovery phase.

The positive macro signposts include the OECD leading index which registered a positive uptrend for the eighth consecutive month, signalling the broadening base of recovery in both the developed and emerging economies.

Also, there has been a positive expansion in domestic industrial output which will continue going into 2010, driven by the turn in inventories, reviving domestic demand and continued recovery of exports.

Lee has revised up the real GDP growth to 2 per cent year-on-year in the fourth quarter from 1.8 per cent and the economy to chart a 3.5 per cent growth next year, underpineed by domestic demand and recovery in exports.

Compared with the rest in the region, Malaysia's recovery is trotting along, commented Manokaran Mottain, senior economist with AmResearch.

Conditions in the country have improved as a result of the government's commitments on structural reforms, loose monetary policy measures, stimulus spending and improving external environment.

As in elsewhere in Asia, Malaysia has also implemented a large fiscal stimulus to help recovery and such benefits will continue to come through for several quarters.

"Given the country's low domestic and foreign government debt levels, fiscal policies may remain loose and supportive until economic recovery is confirmed."

A third stimulus package is probably no longer needed as he had suggested earlier this year with a "prudent fiscal policy back on the radar".

Mottain does not, however, expect Malaysia to outperform Singapore in terms of the manufacturing sector.

"This is because Malaysia does not have the exposure to the bio-medicals sector which has boosted the sector and exports in Singapore," he said, comparing with the Malaysian economy's dependence on the electronics sector where growth has been sluggish in comparison.

Kit Wei Zheng of Citi, estimates growth in 2010 to be led by a modest recovery in manufacturing and exports, whilst consumer spending lends further support.

He says a smaller fiscal deficit implies less fiscal support for the economy than initially expected.

The key issues shaping medium-term outlook, he said, are the transition to a consumption and services driven economy, structural reforms to kick-start private investments, including addressing gaps in human capital, and medium-term fiscal consolidation.

In the 2010 Budget, the government made itself clear regarding future policy directions, when it trimmed its operating expenditure for next year to help cut its fiscal deficit from 7.4 per cent of GDP to 5.6 per cent of GDP in 2010.

"Because of the government's fiscal policy change, we do not think Malaysia's upswing will come under serious threat," remarked Mottain.

The government has also raised its GDP projection to -3 per cent for 2009, from its previous estimate of between -4 per cent to -5 per cent.

GDP growth may accelerate in 2010, hinged on positive factors such as RM1 billion public spending per month until middle of the year; recent reduction in personal income tax rates and improved economy to raise private consumption; recovery in private investment as well as global demand for Malaysian-made goods.

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