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MEO 2Q 2010

Executive Summary

During the 1Q10, the global economy improved further with developing Asia as the leading engine of growth. This was made possible through sustained domestic demand and better global trade conditions. In tandem with regional economies, GDP growth strengthened to +10.1% y-o-y in Malaysia. The recovery was led by strong revival in the manufacturing sector, especially export-oriented industries.

However, sentiments have turned sour recently. The sovereign debt crisis in Europe has led to doubt on the sustainability of global economic recovery. Furthermore, continued policies tightening measures by China have sent adverse shocks to economic agents worldwide. News flow from BP's accident in the Gulf of Mexico and Australia's proposed Henry Tax also heightened uncertainty among global investors. Other risks include possible implications from the US financial reforms and capital issues from the proposed Basel III banking sector regulations. Together these have negatively affected sentiments towards numerous sector, particularly the exporters

To confront these issues, measures were proposed under the 10th Malaysian Plan based on strategies articulated earlier in the Government Transformation Program (GTP) and the New Economic Model (NEM) to sharpen the competitive edge of Malaysia. These along with further liberalisation efforts on the services sector will attract more investors' participation in the long-run. In terms of addressing the burgeoning fiscal deficit problem, subsidies will be reduced progressively and the tax base widened over the next five-year period.

Against this background, MIER will be revising upwards its 2010 GDP growth rate to +6.5% y-o-y from previously +5.2%. Economic growth is forcasted to reach +5.2% y-o-y in 2011. This is supported by still firm consumer and business confidence, as measured by MIER's Consumer Sentiment Index (CSI) and MIER's Business Conditions Index (BCI), of 110.4 points and 119.6 points, respectively in 2Q10. All sectoral indices recorded mix performances during the period, however.

In tandem with economic recovery and higher global commodity prices, overall consumer price inflation is expected to grow by +2.2% in 2010. MIER anticipates the Overnight Policy Rate (OPR) to maintain at 2.75% by end -2010. This is especially useful in order to assess the effects of previous rate hikes as well as the repercussions from Europe sovereign debt problem. Firmer economic expansion will further lift the OPR to 3.25% in 2011.

Posted by suzy at 12:33 PM