Posted on 26 Mar 2009
Domestic demand likely to be the main support for economy
The Malaysian real gross domestic product (GDP), which is anticipated to bear the full effect of the global downturn, is projected to grow between minus 1% and 1% this year.
According to the Bank Negara 2008 annual report, domestic demand, which is expected to grow moderately at 2.9%, is likely to be the main support for the economy, anchored by public sector expenditure and private consumption.
Growth in private consumption expenditure is projected at 3.5%, with consumer spending largely affected by weaker domestic labour conditions due to higher retrenchments and less favourable employment prospects.
Easing of monetary policy and various incentives to boost spending will provide support for household consumption.
To recap, Bank Negara has reduced the overnight policy rate by 150 basis points since November 2008 to 2% and cut the statutory reserve requirement by 300 basis points to 1%.
In addition, the Government has reduced Employees Provident Fund contributions to 8% from 11% as well as offered higher vehicle loan eligibility for civil servants.
Likewise, public sector expenditure will be buoyed by the Government’s pump-priming plan involving the first package of RM7bil and the second plan of RM60bil.
On the supply side, sectors that are directly exposed to external demand will be the most affected this year.
Output in the manufacturing sector will be significantly dragged by the contraction in the export-based industries, especially electrical and electronics, and weaker support from the domestic-oriented businesses. The manufacturing sector is projected to tumble by 8% this year.
The services sector, meanwhile, will remain the anchor for the economy with a relatively moderate growth of 4.5% and contributing 2.5% to the overall GDP growth. The agricultural and mining sectors will contract by 2% and 0.4% respectively on lower production of palm oil, rubber and crude oil amidst lower prices.
Construction sector is expected to expand by 3%, thanks to implementation of projects under the two economic stimulus packages.
Labour market conditions are anticipated to deteriorate, with unemployment rate projected to increase to 4.5% in 2009. Businesses that are sharply affected by poor external demand will continue to implement cost-cutting measures, including temporary layoffs and retrenchments.
Although the public sector will increase the number of employment, this will not fully offset the weak employment prospects in the private segment.
Headline inflation is expected to average 1.5% to 2% in 2009, easing from last year’s peak levels due to the sharp reversal in global commodity prices and slowing global inflation.
On the external front, the current account surplus is projected to moderate but remain sizeable at RM80bil or 11.5% of gross national income this year as export contraction will mainly be offset by import compression.
The services account will record a deficit in 2009 due to the moderation in the travel account.
On the financial account, gross inflows of foreign direct investment are expected to moderate this year as multinational companies postpone their investment plans until clearer signs of recovery are in sight. Private investment is projected to decline by 17.7% this year.
Nevertheless, the strengths of the Malaysian economy – including a strong banking sector, healthy external position, high savings and relatively low indebtedness among individuals, businesses and the Government – will provide flexibility for the economy to weather the present challenging conditions and recover once the global economic and financial conditions stabilised.
