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MEO 3Q 2010

Executive Summary

After a blistering pace in the 1Q10, the global economy softened in 2Q10. This cyclical slowdown is expected to persist in 2H10, given weaker global trade conditions and the ongoing sovereign debt problem in the Eurozone. Nevertheless, developing Asia continued to lead global growth through their resilient domestic demand. Similarly in Malaysia, economic growth decelerated to 8.9% yoy in 2Q10 on slower growth in net exports. Domestic demand was strong with private investment gradually recovering. All key sectors moderated, but were dominated by manufacturing and services.

Using this data, MIER maintains 2010 and 2011 economic growth of 6.5% and 5.2%, respectively. Importantly, these forecasts are also supported by recent in-house surveys. The Business Conditions Index (BCI) fell sharply to 104.9 pts in 3Q10, which more than offsets the surge in the Consumer Sentiment Index (CSI) to 115.8 pts. Other indices also painted a similar gloomy environment ahead.

In terms of interest rates, MIER anticipates the OPR to be kept at 2.75% until end-2010. This is useful in order to assess the effects of previous rate hikes and the possible impact from economic fallout in the Eurozone. The OPR will trend higher to 3.25% in 2011, in tandem with a higher overall CPI forecast of 2.5% yoy (2.2% in 2010).

Recent foreign exchange liberalisation measures have lifted RM sentiment and should be conducive for further development of the financial market. However, these measures also generated more volatility to exporters. MIER forecasts average RM/USD of 3.20 in 2010 before strengthening further to 3.10 in 2011.

Posted by suzy at 11:41 AM