Published January 14, 2009

M'sia may slip into recession in Q1, says Citigroup

Pace of economic slowdown faster than expected

By PAULINE NG
IN KUALA LUMPUR

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MALAYSIA may slip into a technical recession in the current quarter going by recent economic data which suggest the prospects for growth are rapidly weakening.

In fact there is an off chance the country is already in a technical recession, according to Citigroup Malaysia which raised the possibility yesterday in an Outlook 2009 report.

Confirmation of fourth quarter growth would only be known next month, but one thing is increasingly clear: the domestic economic decline is deteriorating at a faster-than-expected clip.

But Citigroup's premise of a country already in recession is the first expressed so far, and could put the spotlight on the government's initiatives to counter the slump particularly since it has steadfastly maintained economic fundamentals are strong enough to avert a recession this year.

In light of deteriorating statistics, however, the official growth projection of 3.5 per cent is looking less likely by the day.

Citigroup believes even if there is growth, it would be marginal at 0.5 per cent before improving next year to 4.2 per cent.

Indeed, last week's industrial production numbers shocked analysts - the 7.7 per cent year-on-year contraction in November (after a near 3 per cent decline in October) was the steepest fall in almost seven years. The decline was 1.2 per cent higher than market consensus after the manufacturing sector contracted 9.4 per cent on the back of flagging external demand, but worryingly, also on markedly weaker domestic demand.

In the past three months, the growth outlook has turned 'bleak', CIMB chief economist Lee Heng Guie said, and GDP in the fourth quarter is expected to ease sharply to between 1-2 per cent. 'The sharper-than-expected decline in industrial production, along with continued exports contraction flags a substantial deceleration in economic growth in the fourth quarter.'

Given the worsening global outlook, he acknowledged a 30 per cent chance of Malaysia falling into a technical recession in the first half of the year, and in the worst case, the economy could contract half a per cent this year.

Over the past few years a reliable contributor to growth, domestic consumption has gone sluggish. Consumer loan applications and approvals are down and spending by small-to- medium sized enterprises is starting to slow, Citigroup said.

But perhaps more telling was the abrupt manner in which Treasury reversed its decision on spending curbs implemented around mid-last year after commodity prices sky rocketed. Government department and agency heads were told the ban on new car purchases, and other work-related assets were lifted as were office renovations.

After a RM7 billion (S$3 billion) economic stimulus package was unveiled in November, there are expectations another one is needed to arrest the slowdown made worse by the spectacular collapse of global oil and crude palm oil prices.

Both contributed significantly to export growth last year and together accounted for 60 per cent of the current account surplus of nearly RM100 billion for the first nine months of the year.