The road to global recovery appears to be sluggish and uneven, with many daunting challenges along the way. Both the World Bank and the IMF are projecting the world economy to slide into a deeper recession in 2009. In July 2009, the IMF revised its global economic forecast to -1.4% in 2009 (2008: 3.1%), while the global contraction in 2009 is estimated at -2.9% by the World Bank. According to the latest IMF revision, the US (2009: -2.6%) will experience a less severe recession in 2009 compared to Europe which may face a deeper one (2009: -4.8%). The IMF projects the world economy to recover to around 2.5% growth in 2010, with the US recording a meagre 0.8% growth in 2010, slightly higher than the previous 0% growth forecast.

As the external sector tumbles, Malaysia’s GDP contracted by a steep -6.2% in 1Q09, following a stagnant 0.1% growth in 4Q08. As external demand nose-dived, Malaysia’s exports dipped sharply in 1Q09, and investment was severely affected as well. Given the deteriorating global economic prospects, a second stimulus package amounting to RM60 billion (about 9% of GDP) was unveiled in March 2009. Although the second package appears larger, the actual direct spending is only RM15 billion (or 25% of the total amount) to be spent over a two-year period. 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. With the second stimulus package, the fiscal deficit is estimated to rise to 7.6% of GDP in 2009, up markedly from 4.8% in 2008.

In a move to make Malaysia more attractive to investors, liberalisation measures have been announced. Starting 22 April 2009, 27 services sub-sectors were fully liberalised to foreign investors, on the premise that Malaysia lacks expertise and local investments in many of these sub-sectors. Among the sectors opened up are computers and related services, health and social services, tourism services, transport, recreational, business services and shipping. On 30 June 2009, the long standing 30% bumiputra equity requirement for newly listed companies was removed, making investment conditions less restrictive. This will bring Malaysia’s equity market closer to regional benchmarks, but the impact remains to be seen since there are many factors influencing investment decisions.

In the wake 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 2.0% on 24 February 2009, the third time in five months. Bank Negara has slashed 1.50 percentage points from 3.5% since November 2008 and cut the statutory reserve requirement (SRR) to 1.0%, effective March 2009. Bank Negara has noted that lower rates could hurt savers and those who rely on incomes from deposits. At the latest policy meeting on 26 May 2009, it was decided that the policy rate shall remain unchanged in view of the persistent effects of the crisis amid early signs of stabilisation in some indicators.

Consumer and business confidence has improved in 2Q09, possibly influenced by the measures taken to support the economy. These include the fiscal stimulus packages, the historically low interest rates, and the recent liberalisation measures. Both the Business Conditions Index (BCI) and the Consumer Sentiments Index (CSI) have passed the 100-point threshold that separates expansion and contraction. The BCI, which is based largely on firm-level information, has gained 44.1 points to stand at 105.2 points in 2Q09, up from 61.1 in 1Q09, indicating that business confidence has regained some strength. Likewise, the CSI has notched up 26.9 points to 105.8 points in 2Q09, up from 78.9 points in 1Q09. Despite the still sharp declines in monthly indicators, the rise in sentiments could have been propped up by the perception that recent measures would stabilise the economy.

There are signs and a glimmer of optimism that indicate the global downturn has stabilised somewhat, but the recovery is expected to be sluggish and uneven. The healing from the current crisis will be difficult compared to previous ones because of the synchronised nature of the downturn. 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 as bad loans could rise soon, limiting the flow of funds to firms. The services sector will be the pillar of strength amidst a glum manufacturing sector. It is 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. Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.

In view of the deep declines in macro indicators, the fragile business and consumer confidence, and the still dismal sectoral indices, we have revised Malaysia’s growth forecast for 2009 downwards to -4.2%, from -2.2% earlier. If exports and FDI shrink severely, the downturn could be more damaging. We have also downgraded the 2010 growth forecast to 2.8%, from 3.3% previously, in anticipation of a gradual or ‘u-shaped’ global recovery.