Both the World Bank and the IMF are projecting the world economy to slide into a deeper recession in 2009. The latest revision projects the three major economies of US, Europe and Japan falling into deeper recessions in 2009. Japan is foreseen to contract the most (-5.8%) in 2009, trailed by Europe (-3.2%), and the US (-2.6%). The IMF projects the world economy to recover to around 1.5 – 2.5% growth in 2010, with the US recording a meagre 0.2% growth in 2010.

Given the deteriorating global economic prospects, a second stimulus package amounting to RM60 billion (about 9% of GDP) was unveiled in March 2009. The RM7 billion in the first package (November 2008) was deemed to be insufficient to counter the deepening crisis. Although the second package appears larger, the actual direct spending is only RM15 billion (or 25% of the total) to be disbursed over a two-year period. Other measures introduced are in the form of loan guarantees, investment through Khazanah and tax incentives. The loan guarantees will only work if there is demand from businesses, which is lacking at this point of time. The recurring concerns have been the speed and efficiency of implementation and the potential leakages. A notable point is the greater attention given to retrenched workers and unemployed graduates.

In view of the deteriorating global economy and its adverse effects on domestic conditions, Bank Negara reduced the Overnight Policy Rate (OPR) by 50 basis points to 2.00% on 24 February 2009, the third time in five months. Bank Negara has slashed 1.50 percentage points from 3.50% since November 2008. To add liquidity into the system and reduce the cost of funds, the statutory reserve requirement (SRR) has been progressively cut from 4.0% in November 2008 to 1.0%, effective March 2009. Bank Negara has noted that lower rates could hurt savers and those who rely on incomes from deposits.

Consumer and business confidence has remained depressed in 1Q09, but the indices have registered minor gains. Both the Business Conditions Index (BCI) and the Consumer Sentiments Index (CSI) have stayed way below the 100-points threshold that separates expansion and contraction. Despite the sharp declines in monthly indicators, the minor rise in confidence could have been propped up by the release of the second stimulus package.

The recovery from the current crisis will be difficult compared to previous ones because the scale has reached global proportions. It will take time and huge resources to revive the deeply entangled US financial sector, while policy options are running out. The weak external sector will impede a faster recovery, and the lower commodity prices are not helping either. Banks are becoming more cautious, limiting the flow of funds to firms. Domestic demand would be shored up by fiscal pump-priming and an easier monetary policy, providing a partial cushion to the sagging Malaysian economy. The services sector will be the pillar of strength amidst a glum manufacturing sector. It is almost certain that Malaysia’s growth will slide into a technical recession in the first half of 2009, as it takes the hit from the knock-on effects of a flagging global economy.

In the light of the deep declines in macro indicators, the gloomy business and consumer confidence, and the dismal sectoral indices, we are obliged to revise Malaysia’s growth forecast for 2009 downwards to -2.2% from +1.3% earlier. If exports shrink severely, the downturn could be more harmful. We have also downgraded the 2010 growth forecast to 3.3%, from 3.8% previously, in view of the anticipated gradual and bumpy recovery in the global economy.