Economy on the mend

Written by Chong Jin Hun
Thursday, 27 August 2009 11:33

KUALA LUMPUR: The domestic economy showed signs of a recovery in the second quarter (2Q), as it contracted at a slower pace of 3.9% compared to a year ago, underpinned by stronger domestic demand, mainly due to higher public spending and growth in private consumption.

Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said yesterday she expected a gradual recovery with positive territory in 4Q.“There are increasing signs that conditions in the global economy are stabilising. The domestic economy continued to be affected by the weak global economic activity in the second quarter as reflected in the continued sharp decline in exports,” she said.

However, Zeti said domestic demand was expected to strengthen in the second half of this year, helped by the availability of financing and improvements in the job market. With gross domestic product (GDP) shrinking 6.2% in 1Q, the contraction for the first half is 5.1%. On a quarter-on-quarter basis, GDP expanded by 4.8% in 2Q.

Zeti said in 2Q, the manufacturing sector contracted at a slower pace of 14.5% from the 17.9% in 1Q due to an improvement in production for inventory restocking.Mining recorded a slower 2.6% decline (-5.2% in 1Q); agriculture posted positive growth of 0.3%(-4.3%) while services expanded 1.6% (-0.2%).

Zeti. Photo by Mohd Izwan Mohd NazamGDP growth in 2Q was supported by higher public spending amidst weak external demand. Aggregate domestic demand contracted at a slower annual pace of 2.3% from 2.9% in 1Q. Private sector consumption grew 0.5% while public sector spending expanded by 1%.

The government had earlier projected GDP to shrink between 4% and 5% this year. However, the 3.9% contraction in 2Q was better than economists’ expectations of a contraction of 5%.“There will be a revision,” Zeti said, adding the revised forecast would be released when the Budget proposals for 2010 were unveiled in October.

Further signs that the domestic economy was improving were the slower decline in industrial production, export contraction moderating, improving labour market conditions and better consumer and business sentiments.“Factors supporting domestic demand were accelerated implementation of fiscal stimulus, lower inflation, improvement in labour market conditions, continued access to financing and an accommodative monetary policy,” she said.

The government is implementing two stimulus packages totalling RM67 billion over two years to cushion the economy from the global financial crisis.Zeti said 3Q numbers would continue to decline at a slower pace, before leaping into positive territory in the fourth quarter. She added that intra-regional trade had improved, including with Indonesia, Vietnam and China but our exports to advanced economies were still showing a quite significant contraction.

Asked why Malaysia lagged other Asian economies which were recovering at a faster pace, Zeti said Malaysia’s exports were affected by a fall in commodity prices, unlike other Asian economies which were not commodity-based.On whether Malaysia would face a double-dip recession, she said this was unlikely because the country, like other Asian economies, was not facing a financial crisis.

Zeti added that the domestic financial sector was “solid and sound” with continued access to financing.Germany’s ambassador to Malaysia Dr Guenter Georg Gruber, who is an economist by training, said Malaysia was well-positioned to boost its economic fortunes, and the key challenge now was to spur the country’s progress in the knowledge-based sphere.

“The real challenge is how to go ahead from here. Malaysia has to go to the next knowledge-based level which needs an educated workforce which is more expensive,” Gruber told The Edge Financial Daily yesterday.