|
|||||||
|
|
|
|||||
|
|
|||||||
Malaysian
Economic Outlook
3rd
Quarter Update 2001
Executive
Summary
Just when most people thought the
US economy is closing in on a turnaround sometime at year-end, a tragic and
despicable incident happened on Sept. 11. The
attacks on the World Trade Centre will have an adverse economic impact on the
already weak US economy, and the fallout will continue to spill over to the rest
of the world in the near term. The
terrorist attacks and the military campaign in Afghanistan, which could drag on
for a long time, have increased the element of uncertainty with regard to the
state of the global economy.
The US economy, which is only
barely growing in the second quarter, crossed over into the negative zone in the
third quarter, contracting by 0.4 per cent.
Consumer confidence in the US has been badly affected, sinking to a
7-year low. This will send
consumption, a key factor which has kept the US economy afloat all this while,
reeling badly. The prompt and
concerted efforts to cut interest rates and inject liquidity into the banking
system by the G7 countries have helped stabilise financial markets worldwide.
A recession in the US economy will
have severe knock-on effects throughout the world, as the US is in no position
to lead the upturn in the global economy. With
Japan and Europe languishing further, the global economy is more likely now to
head for a recession (a growth figure of 2.0 per cent or lower is considered a
global recession). The global
recovery many are expecting at year-end will be delayed by a few quarters to
possibly sometime in the second half of 2002, which means that Malaysia’s
rebound would be deferred as well. Exports
to the US and other trading partners will drop further, while FDI inflows may
dry somewhat. The Malaysian
economy, already on the downtrend since early 2001, will have to brace itself
for tougher times.
On
the domestic front, two packages were introduced prior to Budget 2002, RM3
billion in March and RM4.3 billion in September, to help cushion the downturn in
the Malaysian economy. Fiscal pump
priming, however, has not been progressing as fast as intended.
At times, infrastructure projects have been delayed due to long land
acquisition process. The government
is looking into expediting fiscal spending so that the impact will be more
immediate. This is reflected in
Budget 2002 where money is going to be put directly into consumers’ pockets
with the 1-2 per cent income tax cuts. Civil
servants, which represent about 11 per cent of the workforce, are getting a
half-month bonus along with a 10 per cent pay raise.
Budget
2002 represents a distinct shift towards uplifting consumer sentiments and
boosting spending. Infrastructure
and construction spending have been included in the RM3 billion package in March
while the RM4.3 billion package in September stressed more on training, welfare
and rural development. How private
spending will play out will probably depend on how consumers make sense of the
more uncertain and gloomy economic prospects.
It is more likely that consumers would remain cautious and spend
moderately under currently weak sentiments.
MIER’s
Business Conditions Index (BCI) slipped to 42.6 in the third quarter, the lowest
reading since third quarter of 1998 and very much below the 50-point
“recessionary” threshold, while the Consumer Sentiments Index (CSI) stood at
98.7, still well under the threshold of 100 points.
Nevertheless, the CSI edged up slightly from 96.2 points in the second
quarter.
The
private sector was disappointed that the eagerly awaited corporate tax cuts did
not happen, which means that there is little saving grace for hard times to
come. It is argued that
Malaysia’s generous tax incentives have made the corporate tax rate
effectively much lower than the listed 28 per cent.
Even if not much goodies were offered to the private sector, the
combination of government and consumer spending would generate some demand for
products and services from them. Due
to the delays in implementing fiscal stimulus and the little time remaining this
year, pump priming will make more contribution to next year’s growth.
On
monetary policy, Bank Negara went ahead to cut the intervention rate by 50 basis
points to 5.0 per cent on Sept 20. This
could only be of little help to encourage more spending and investment
activities which has tumbled drastically, aggravated in part by fragile business
and consumer confidence. More rate
cuts may not necessarily push up lending activities but it could help ease
financially stressed companies.
The
large foreign trade and investment share in Malaysia’s GDP will mean that the
fiscal stimulus and easy monetary policy can only offer limited support to
counter the slumping external sector. Furthermore,
steeply falling economic indicators have not abated. In light of the aftermath of the US attacks and its impact on
the global economy, we foresee the Malaysian economy registering a marginal 0.3
per cent growth in 2001.
We
cautiously assume that the recent RM4.3 billion package, which concentrates on
small short-term projects, would generate some immediate results.
The slight rise in sentiments, as shown by minor gain in the CSI, could
mean better spending reaction arising from the half-month bonus for civil
servants and the year-end festivities. If
conditions in the fourth quarter deteriorate too much, then growth for the whole
year can easily sway into the negative zone.
Technical
recession (two consecutive quarters of contraction) in the second half of 2001
now appears to be more than a theoretical possibility.
Had it not been for the timely government intervention through fiscal
stimulus, the Malaysian economy would have slipped into a full-blown recession.
The
impact of Malaysia’s pump priming measures and the easy monetary policy will
become more widespread in 2002. With
the US economy projected to only show some recovery in the second half of next
year, we will likely register a modest GDP growth of 3.2 per cent in 2002.
This of course assumes that uncertainties related to terrorism and the
military intervention will be contained.
The
IMF projects the US economy to expend by 2.2 per cent in 2002, and the Euro area
to improve and post a similar 2.2 per cent GDP growth. Japan will remain an outlier and is forecast to register a
marginal 0.2 per cent growth in 2002, following a forecast of 1.2 per cent
contraction in 2001. As developed
countries scale their way back to potential growth path, Malaysia could return
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, National Economic Outlook, 2002 Conference
6-7th
November 2001
Shangri-La
Hotel, Kuala Lumpur