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1ST
quarter Update, 2001
Malaysian
Institute of Economic Research (MIER)
Following a strong growth last year, the Malaysian economy will face a slowdown this year, in the wake of a decelerating US economy and the downturn in electronics demand. While the electronics sector and high commodity prices saved the day during the last Asian crisis, this time around they became part of the problem. With declining contribution from external earnings, economic growth will have to be driven by domestic demand. The government has recognised this and is taking pre-emptive counter-cyclical initiatives by introducing several measures to boost consumption and investment. An extra 3 billion addition to the RM26.8 billion budget for 2001, a 2 per cent cut in employees’ EPF contribution, and additional as well as lower concessionary rate funding for SMEs are among measures introduced to help bolster consumption and investment. Projects selected for pump priming, the government says, will be implemented promptly and will have low import content and high multiplier effects. These additional measures are said to be able to increase GDP growth by another 1.1 percentage points, so as to push the full year 2001 GDP growth to 6 per cent. However, these estimates are made under the assumptions that the US economy grows by about 2.0 per cent in 2001 and that fiscal spending proceeds smoothly.
On monetary policy, the Bank
Negara insists that, for now, interest rates are low enough to stimulate
investment, while loans growth is loosely targeted at 8 per cent.
Given the government’s low debt level (37% of GDP at end-2000) and
subdued inflation rate, there is flexibility for further stimulus if external
conditions turn for the worse. Furthermore,
ample liquidity in the banking system makes it less difficult to finance the
budget deficit without much crowding out of the private sector.
Confidence plays a big role
in consumption and investment decisions and all indications are that sentiments
are declining. Both MIER’s
business conditions and consumer sentiments surveys show a steep drop in
confidence. The BCI slid to 46.3
points, crossing the 50 points benchmark, a sign that the economy may be heading
for a major slowdown, while the CSI fell by a significant 9.9 points down to
105.7 points, slightly above the threshold of 100 points.
News of retrenchments from the banking industry and the electronics
sector in Penang, and the downtrend in the stock market make matters worse.
Instead of spending the extra income arising from the EPF cut, consumers
might just add it to their voluntary savings, as times are not looking good and
confidence is waning. The cut in EPF’s compulsory savings may just transform to
precautionary savings instead of being spent.
This will negate the intended effects of the EPF cut on consumption.
We feel that the pump priming may not have as much impact on the economy
as expected, and furthermore, it will take time for the measures to work through
the system. The assumptions made
can be elusive especially when lower confidence reigns on business and
consumption decisions. The above
considerations compel us to revise our GDP growth forecast for 2001 downwards to
4.0 per cent, from previous 5.0 per cent. Inflation
is a lesser issue with slower economic growth and somewhat stable import prices.
Although income will continue to rise, private consumption is going to be affected more by lower confidence and the downtrend in the stock market. We project private consumption to decelerate to a 6.5 per cent growth in 2001, from 12.4 per cent in 2000. With slower economic growth in the US and Japan, we expect FDIs to be less forthcoming, despite high MIDA approval figures. The softening economy and weakening confidence will affect local private investment, which we project to expand at a slower pace of 8.4 per cent (2000 : 26.7%). On the back of the fiscal stimulus package, public expenditure is predicted to pose good growth. With the on-going infrastructure projects, public works and other socio-economic spending for the purpose of pump-priming, public investment could grow by 8.8 per cent (2000 : 21.7%) while public consumption is projected to grow by 12.0 per cent (2000 : 1.7%). As it will take time to implement projects, the impact of the fiscal push may extend to next year. Overall, we expect domestic demand to grow by 8.0 per cent, contributing more to economic growth than net exports.
The much slower economic
growth in US and Japan, coupled with the downturn in the electronics market,
will adversely affect real exports, which are projected to record a 4.3 per cent
growth (2000 : 16.3%). Imports,
which are closely tied to exports and domestic performance, will show a softer
growth of 7.8 per cent (2000 : 23.6%). Lower
global inflation, relatively lower oil prices, and weak economic growth and
sluggish demand at home will keep inflation low, at less than 2.0 per cent.
In the balance of payments, merchandise exports will feel the pinch of
faltering external demand with a slower growth of 3.7 per cent (2000 : 16.9%),
while imports are projected to rise by 9.2 per cent (2000 : 26.2%).
The resulting merchandise balance will narrow to RM66.6 billion from
RM79.5 billion in 2000. With the services deficit being at a large RM42.0 billion,
the current account surplus in projected to be at RM17.0 billion or 5.3 per cent
of GNP in 2001 (2000 : RM31.2 bill or 10% of GNP).
We are still maintaining our forecast of 6.0 per cent GDP growth in 2002. This is based on the argument that the loose monetary stance in the US would have begun to bite by then and this will stabilise the US economy. The Japanese economy may show some improvement while Europe could hold steady. The electronic cycle could have made a turn by then with other sophisticated gadgets being introduced into the market. The expansionary impact of the current fiscal stimulus at home will spill over largely into 2002.
Source: MIER, Sixth
Corporate Economic Briefing, April 17, 2001