Malaysia predicts upturn as economy shrinks

From Financial Times
By John Burton in Singapore

Malaysian officials forecast on Wednesday that the economy would resume growth by the fourth quarter, as they reported an unexpectedly steep contraction of 6.2 per cent for the first quarter from a year ago.

The export-dependent economy will shrink at a “very similar” rate in the second quarter, marking Malaysia’s first recession in nearly eight years, the central bank said. Economists surveyed by Reuters had earlier predicted a drop of 4 per cent for the first quarter. Zeti Aziz, central bank governor, said on Wednesday: “We see that the exports sector and export demand continue to remain weak and the environment is still challenging.”

Malaysia has Asia’s third most trade-dependent economy after Singapore and Hong Kong.

Mrs Zeti predicted that there would be “a significant improvement” in the third quarter of the year and added that there was “a higher degree of confidence that we will have positive growth” in the fourth quarter. The government is expected to issue on Thursday a revised economic forecast for the year. In March it predicted growth for the year of between 1+ to 1- per cent, revising an earlier target of 3.5 per cent growth. The economy expanded by 0.1 per cent in the fourth quarter of 2008.

Ms Zeti said the economy will improve in the second half of the year due to a M$60bn ($17bn, €12bn, £10bn) stimulus package unveiled in March and improved lending conditions.

Domestic consumption contracted by just 0.2 per cent in the first quarter against a 15.2 per cent fall in exports. Public sector consumption rose by 2.1 per cent.

Exports could also increase as industrial customers in overseas markets complete large inventory drawdowns of electronics components and commodities, Malaysia’s main products, that began in the first half of the year.

Malaysia’s economic performance in the first three months of 2009 was better than that of neighbouring Singapore, which contracted by 10.1 per cent, and that of Thailand, which contracted 7.1 per cent.

The slowdown has increased pressure on Malaysia to introduce economic reforms, including easing rules giving preference to ethnic Malay businesses.

Najib Razak, prime minister, recently rolled back some pro-Malay rules in the service sector to encourage foreign investment. Mr Najib wants to raise the service sector’s share of the economy to 70 per cent of gross domestic product, from 54 per cent, to reduce the country’s heavy dependence on exports.