Published October 17, 2008
M'sian growth seen falling to 3.4% in 2009
Impact of global financial turmoil will be more severe than '98 crisis: think tank
By PAULINE NG IN KUALA LUMPUR

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MALAYSIA'S economic growth is expected to slip to 3.4 per cent next year, possibly slipping into a technical recession in the second or third quarter, according to an independent economic think tank.

Hopeful sign: This year ought to be relatively positive for Malaysia given that the economy ran at a strong pace in the first two quarters, says think tank Mier
In an outlook report yesterday, the Malaysian Institute of Economic Research (Mier) warned that unlike the sharp V-shaped recession of the 1998 Asian financial crisis, the effects of the current global financial turmoil would be U-shaped and more severe, with 'strong headwinds' lasting for about two years.
Because much of the global problem is still uncertain, Mier's growth forecast does not take into account a recession, executive director Mohamed Ariff said, but neither should one be ruled out. 'There is a 40 per cent chance of a technical recession,' he observed, the declines in the various consumer and business confidence indices plus export weakness in August supporting such concerns.
Earlier this week, Malaysian leaders assured that the nation's strong fundamentals - high liquidity, robust current account surplus and reserves and healthy savings - would help it ride out the global turmoil and stave off recession this year.
The last recession to hit home was during the currency crisis of 1998 when the economy contracted 7.4 per cent, although a technical recession also occurred in 2001 during the dot-com bust. Growth, then, was a nominal 0.5 per cent.
Mier agreed this year ought to be relatively positive given that the local economy ran at a strong pace in the first and second quarter of 7.1 and 6.3 per cent respectively. Its gross domestic product (GDP) estimates for the year have been revised upwards to 5.3 per cent from 4.6 per cent previously. After all, the knock-on effects of a flagging global economy are only expected to hit towards the end of the year.
In its 2008-2009 economic report launched in August, the government had projected a GDP of 5.7 per cent this year, falling to 5.3 per cent next year.
Lower income earners can be expected to bear the brunt of the pain. The rural sector is not spared in this round owing to the drastic decline in commodity prices. Bullish crude oil and crude palm oil prices over the past three to four years had helped cushion the effects of higher prices, but have plunged by more than half since hitting their peaks in the first quarter.
A major worry is Malaysia's heavy reliance on oil revenue to finance its fiscal spending as more than 40 per cent of its revenue is derived from petroleum dollars.
Although the government had expected to slash the budget deficit of some 4.8 per cent of GDP this year to less than 4 per cent next year, Mier doubted it would be achieved.
Because Malaysia continues to run a budget deficit and its interest rates are already low - the overnight policy rate at 3.5 per cent is one of the lowest in the region - its use of fiscal and monetary instruments is limited.
Nonetheless, the social safety net needs to be strengthened, Mr Ariff said, with more assistance to be channelled to the urban and rural poor.
Petrol prices have been reduced thrice since a shocking 42 per cent increase in June, but food and transport costs remain stubbornly high.
Mr Ariff expects more relief measures to be unveiled next week when the government is scheduled to announce additional steps to counter the spiralling global crisis.