The world economy continues to be led by developing Asia, with advanced nations lagging behind. Developed economies are slowly recovering with little price pressures. In contrast, developing Asia remains robust with strong domestic demand and rising inflationary pressures. The recent disaster in Japan has been felt by numerous countries, particularly through the manufacturing chain. With the end of the U.S. quantitative easing in June 2011, the global economy will be influenced by the European debt crisis and volatile commodity prices. Major currencies will likely consolidate against the U.S. dollar, while emerging currencies are set to appreciate further.

In Malaysia, the 1Q11 GDP growth recorded a healthy 4.6% year-on-year, with private (6.7%) and public (6.1%) consumption offsetting a larger drag from net exports (-24.2%). By sector, services (5.9%) and manufacturing (5.4%) were the main growth drivers. Economic growth momentum will probably moderate in 2Q11 on supply disruptions from the Japan disaster, pullback in commodity prices, rising cost-push inflation, and higher debt servicing burden. Rebound is expected in 2H11 due to the reconstruction of Japan and implementation of ETP projects. Hence, 2011 GDP growth will reach 5.2% year-on-year, before propelling higher to 5.5% in 2012.

Reflecting the ongoing uncertainties in the global and regional economic outlook, the in-house Consumer Sentiments Index (CSI) declined slightly to 107.9 points in 2Q11, while the Business Conditions Index (BCI) edged up marginally to 114.0 points. Retail Trade Index (RTI) and Tourism Market Index (TMI) followed the trend exhibited by BCI to 124.8 points and 125.4 points respectively. Conversely, Automotive Industry Index (AII), CEO Index, and Residential Property Index (RPI) moved lower to 120.8 points, 111.9 points, and 128.0 points respectively.

Overall CPI increased 3.3% year-on-year in May 2011 and is likely to peak at 3.8% by June 2011 due to recent hikes on electricity tariffs (average 7.12%) and gas prices (28.0%). During 2H11, inflation will probably be around 3.5% with upside risks from indirect second round effects. Consequently, MIER expects another hike in the OPR by 25bp. CPI will average 3.3% in 2012 prompting further hikes in OPR to 3.5%.

Recent foreign exchange liberalisation measures will be neutral on the performance of the Ringgit since higher direct investment abroad will be offset by inflows from more trade finance and easier borrowing rules from non-resident related companies. Thus, RM/USD is projected to average around 3.00 in 2011. 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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For more information, please contact Dr. K.K. Foong, Senior Research Fellow
Email : kkf70us@yahoo.com