Twenty-Fourth National Economic Briefing

The Slow and Bumpy Road to Recovery

Hit by the worst crisis in more than 60 years, major developed countries reported synchronised and deep contractions in the first quarter of 2009 (1Q09). The sharpest drop in GDP was recorded by Japan at -15.2 per cent (annualised rate), followed by US (1Q09: -5.7%), and EU (-4.8%). The economic contractions are expected to continue albeit at a reduced rate in 2Q09, as indicators appear to be stabilising. There are 'green shoots' or early signs that the US economy may bottom out, notwithstanding questions over their sustainability. The number of job losses in the US has decreased for the second month in May'09, but unemployment continued to rise to 9.4 per cent, the highest since 1983. Manufacturing orders in the US, EU and Japan have improved slightly, suggesting a gradual but fragile recovery.

With little results coming out of the first stimulus package, the Malaysian government unveiled a second package worth RM60 billion recently. This package appears to have a wider coverage, including measures to help retrenched workers, steps to get loans flowing to the business sector, subsidies to keep prices of necessities in check and funds to boost investments. The government has lowered its growth forecast for 2009 to a range of -1.0 to 1.0 per cent, cautioning that hard times may last longer than earlier expected.

To be sure, the road to recovery will not be smooth sailing. The synchronised nature of the global downturn will make the turnaround more difficult. The US banking sector requires major reforms in the areas of transparency, governance and oversight mechanism, to mention broadly. Consumers in developed countries are still not in the mood to spend, being thriftier instead, and this constrains private consumption. Lately, the long-term interest rates have risen due to fears over aggressive pump priming and massive government borrowings. Oil prices are once again heading upwards, as investors become overly bullish on the recovery prospects even when fundamentals are still dismal.

Following a sharp -6.2 per cent contraction in 1Q09, the Malaysian government has significantly revised downwards its GDP projections to a range of -4.0 to -5.0 per cent contraction in 2009, from -1.0 to 1.0 per cent previously. Although industrial output has shrunk by a smaller scale (-11.4%) in Apr'09 (Mar'09: -12.7%), exports were still languishing with a fall of -26.3 per cent (Mar'09: -15.7%). The steep drop in imports (Apr'09: -22.4%) implies that export recovery is not coming any time soon. Although domestic indicators are giving mixed signals, what looks certain is that Malaysia may not regain full strength until the global economy is back on track, which is going to be at a disappointingly sluggish pace.

In the medium-term, the 'New Economic Model' (NEM) that focuses on strategies to elevate incomes and enlarge the middle class has been proposed. This is hoped to raise domestic demand and reduce vulnerability to external shocks. How does the NEM differ from earlier policies? With the fiscal deficit ballooning in 2009, do we have additional resources if the crisis were to prolong? What do MIER's business conditions survey results show in regards to private sector confidence in the Malaysian economy? How do households feel about their financial well-being and job prospects?

The National Economic Briefing by MIER is a forum for discussing these and other issues of concern to the Malaysian economy. We will present the results of the second quarter 2009 business conditions and consumer sentiment surveys during the briefing. We will also be updating the four industry indices for the retail trade, residential property, tourism and automotive sectors. Targeted at senior management and industry captains, this event encourages frank discussion with stimulating debates. Come join us and keep abreast with the latest happenings in the Malaysian economy. Attendance is limited and will be on first-come-first-served basis.