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The military conflict in Afghanistan and the anthrax scare have subsided and some calm has been restored. Sadly, new tensions broke out between India and Pakistan but things have cooled a bit since. On the economic front, there is news to cheer with regard to the US economy. Encouraging signs of a bottoming out process are appearing in the US economy but there are still preliminary and downside risks abound. The US recovery is still premature, tentative and is quite fragile at this point of time. The Fed cut interest rates for the eleventh time on 11th December, bringing down the fed-funds rate to a 40-year low 1.75 per cent. Nonetheless, recent US indicators showed some signs of improvement. Non-defence orders have turned positive for the second straight month, while the Institute for Supply Management business index rose to 48.2 in December, the highest in 14 months. US consumer confidence jumped in December.
Global
semiconductor sales rose in November, the second time in a row, while prices of
memory chips are picking up again. In
Europe, there are murky signs of recovery but visibility is still poor.
Nevertheless, Germany’s factory orders increased in November, while
consumer confidence is stabilising. However,
the situation in Japan is getting worse. Industrial
production for November plunged by 14.3 per cent year-on-year, a level last seen
in 1987. Unemployment rate in Japan
reached a post-war high of 5.5 per cent in November.
Deteriorating fundamentals have sent the yen on a tailspin, another
possible source of global instability. Economic
distress in Argentina is very disturbing but we are fortunate that the contagion
did not spread to our shores. The saga will only make us more vigilant of the ringgit-peg.
At
home, there are glimmers of improvement amid many lingering uncertainties.
Industrial production has improved markedly.
Imports are somewhat better, foretelling a future improvement in exports.
Part of the explanation for stabilising imports has to do with the
bottoming out of the chips market as inventory liquidates further.
The slower pace of declines in major economic indicators supports the
possilibity that the contraction in the fourth quarter could be less than third
quarter’s. In view of this, we
see no compelling reason to adjust our estimated 0.3 per cent GDP growth in
2001. MIER’s fourth quarter 2001
surveys indicate that business confidence is still generally weak, while
consumer sentiments has deteriorated. Worsening
confidence in the fourth quarter highlights the point that visibility on the
upside is quite limited.
We
are cautiously optimistic that the Malaysian economy could register a better
economic growth in 2002, possibly a 3.2 per cent expansion, as we had forecast
in November. Although recovery
signals have appeared, they are still preliminary and tentative.
As such, there are still substantial elements of uncertainty accompanying
our forecast. The rebound in the Malaysian economy in 2002 takes into
account the expected recovery in the US economy, particularly in the second half
of the year. Europe is predicted to
show an upturn as well but at a much more modest pace compared to the US.
The electronics sector is bottoming out and can post a moderate growth
this year.
In the domestic front, measures introduced in Budget 2002 will enhance economic activity. The tax cuts effective this year and higher salaries for civil servants would contribute to a pick up in private consumption. Easy monetary policy and fiscal pump-priming will filter into the system and have a more widespread impact on the Malaysian economy. Private consumption would rebound by 4.8 per cent in 2002 on the back of improving income and the guarded uptrend in the stock market. Fiscal stimulus will continue, albeit at a slightly smaller scale in 2002. Furthermore, leftover funds from last year will have to be spent this year. Public consumption would increase by a moderate 7.0 per cent while public investment would slow down to a 2.1 per cent growth.
With
a turnaround in the global economy, investment will recover somewhat as foreign
investors make their way back into
the country. As production gathers
pace, excess capacity will be taken up, necessitating a revival in investment.
Real exports are projected to expand by 5.3 per cent with the return in
external demand and a pick up in the electronics sector.
Real imports would increase by 8.5 per cent as domestic economic activity
gathers steam. As developed
countries gravitate towards a steadier trend growth, Malaysia should be able to
revert to its growth trajectory with a 5.7 per cent growth in 2003, closer to
the sustainable potential growth which is estimated at 6.5 per cent in the
medium term.
Source: MIER, Malaysian Economic Outlook, 4th Quarte Update.