MIER: Another dip possible in 1H2010

KUALA LUMPUR: The global economy may face a hurdle in the first half (1H) of next year as the potential of a double dip looms over a fragile recovery path.

“There is a strong 50% chance. There is a strong possibility of a double dip happening in the first half of next year. We really expect that to happen,” Malaysian Institute of Economic Research (MIER) executive director Datuk Mohamed Ariff said.

Speaking on the sidelines of the Malaysian 2010 Budget and Tax Planning Conference here yesterday, he said this was due to the enormous liquidity pumped into the US economy. As such, the growth in the US economy would not be sustainable and the recovery of its real economy would be weak.

“The stimulus is artificial (growth) and is not sustainable. It might only start recovering in 2012. That is why I am saying, there may be a bigger dip. In that case, we can forget about our 3% growth next year,” Ariff told The Edge Financial Daily.

The government has forecast that the Malaysian economy will contract 3% this year but register a 3% growth in 2010. MIERforecast a bigger contraction of 3.3% this year and a 3.7% growth for 2010 on expectations of recovery in export destinations, barring the realisation of a double dip.

“The global economy will experience a sluggish recovery even in 2011. I am not convinced we can go back to our previous growth rate so soon because the US is not going to go back to how it was. The US is not going to import and consume as much as before,” he said.

Ariff said major concerns moving forward included depressed external demand, lethargic foreign direct investment inflows, swelling fiscal deficit, liquidity trap and volatile commodity prices.

However, some mitigating factors would be a high savings rate as a buffer, comfortable foreign exchange reserves, the potential strength in the ringgit, a sound banking sector and other policy reforms.

Commenting on Budget 2010, Ariff said the economy needed more liberalisation as most of the measures were short term. “There is nothing much to perk consumption,” he added.

Ariff said beneficial items in the budget such as reduction in personal income tax rate were muted by other considerations.

“The tax on credit cards is a wrong move at the wrong time. We don’t have a credit card crisis in the country. And banks are doing a rolling business on credit cards. This would have a problem on consumer spending,” he said.

Furthermore, he added that the government had to broaden its tax base through the implementation of goods and services tax (GST).

“We need to diversify the tax base. This is where we need GST. It was announced in 2005 that GST would be implemented in 2007 but nothing has happened.

“There is a lot of opposition to GST and a lot of them are against it for the wrong reason. The problem here is populist policies. They are worried they will get less votes if they implement this. We have to educate the public. We cannot reduce income tax and corporate tax if we don’t have something else to replace it. Even Vietnam has GST.

“It is not going to increase inflationary rates as everyone thinks it would. And I think now is the best time to implement GST because we are having disinflation. But we can’t do it because we are not prepared for it,” he said