Recent statistical data indicates that the world economy seems to be gaining momentum and price pressure is slowly building up. Inflation is expected to trend upwards as a result of quantitative easing in the U.S., geopolitical tensions in the Middle East and North Africa, and on the reconstruction of Japan. In addition, the sovereign debt issue continues to affect parts of the Eurozone with repercussions on the global economy. Meanwhile, major currencies will consolidate against the USD, while emerging currencies will likely appreciate further.

GDP growth eased to 4.8% year-on-year in 4Q10 due to further normalisation of economic activities. On a quarterly basis, GDP growth ebbed to 1.5% in 4Q10, while it reached 7.2% on a year-to-date basis. All expenditure items decelerated. All sectors recorded slower rates of expansion, except construction and services.

Recent monthly data (up to Feb 2011) suggests that industrial output was revived following a rebound in gross exports. However, inflation remains stubbornly high with strong pressure coming from food and transport. Post-Chinese New Year, loans and all monetary aggregates decelerated. The performance of the Ringgit against the USD was mixed during the period of consideration.

In Malaysia, economic growth is projected to moderate to 5.2% yoy in 2011, before rising to 5.5% in 2012. Structural impediments in net exports will drag down overall GDP growth in 2011, while domestic demand will likely be strong due to supportive government policy measures.

Meanwhile, the in-house Consumer Sentiment Index moderated to 108.2 in 1Q11 on weaker access to finances and firming inflationary expectations. In contrast, firms’ outlook remains bright as suggested by a stronger Business Conditions Index of 113.3 and CEO Confidence Index of 118.1. The property sector is reasonably healthy (Residential Property Index of 130.0), while tourism weakened on more frequent occurrences of natural disasters (Tourism Market Index of 113.1). Mimicking the trend in the Consumer Sentiment Index, the Retail Trade Index also eased to 99.1. The automotive industry (Automotive Industry Index of 140.0) continues to be supported by favourable policy measures.

With GDP growth within the potential level of 5.0 – 6.0%, coupled with a manageable CPI forecast of 3.2% yoy in 2011, Bank Negara Malaysia is expected to lift the overnight policy rate marginally higher to 3.25% by end 2011. As the economy gathers momentum in 2012, CPI may edge higher to 3.3% prompting further hikes in the overnight policy rate to 3.50%.

The Ringgit is projected to strengthen to 3.05 per USD in 2011 on larger capital inflows. MIER does not anticipate the return of capital controls in the near term following recent liberalisation of the capital account and the lowering of the LTV cap to 70.0% on third home mortgages. Further macro-prudential measures are more likely. Improving macroeconomic fundamentals will see an average RM/USD of 2.95 in 2012.

The Malaysian Institute of Economic Research (MIER)
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Tel : (603) 2272 5897 / 2272 5895     Fax : (603) 2273 0197     Website: www.mier.org.my

For more information, please contact Dr. K.K. Foong, Senior Research Fellow
Email : kkf70us@yahoo.com