Malaysia’s economy seen contracting in first quarter

Malaysia’s economy may have contracted above 3.5% year-on-year in the first quarter based on figures released in January and February that showed year-on-year drops in external trade and industrial output.

According to a poll of six economists by StarBiz, gross domestic product (GDP) is expected to contract due to a drastic drop in external demand since late last year, which became worse in the first two months of 2009 and also caused industrial output to fall.

Malaysian Institute of Economic Research (MIER) executive director Professor Datuk Mohamed Ariff Abdul Kareem said the first half of the year would be challenging for the economy.

He forecasts the economy to contract 2.2% this year. MIER does not give out quarterly forecasts.


“As for external trade, we’ve seen signs that it is moderating but (it) will still see a contraction in the teens,” Ariff said. The Statistics Department is scheduled to release external trade figures tomorrow.

“There will be significant contraction based on the economic figures already released in the first two months of the year,” CIMB Investment Bank Bhd economic research head Lee Heng Guie said.

For January and February, external trade contracted 27.8% and 15.9% respectively year-on-year while industrial output fell 20.2% in January and declined 14.7% in February.

Lee forecasts first quarter GDP to contract by between 5.5% and 6% while for this year as a whole, it could contract 3%. He said this would be in tandem with regional economic performance.

“Singapore’s economy in the first quarter contracted 11.5% year-on-year while South Korea’s shrank 4.3%,” Lee said.

He said the first quarter contraction would look bad when compared with the high base of the same quarter last year, when the economy grew 7.1%.

The economists pointed to the manufacturing sector as the biggest drag on the economy, with export-reliant segments of the sector being the most affected.

“The construction sector will not see much of an impact from the pump-priming activities that the Government has instituted until at least the end of the second quarter,” Lee said.

RHB Research Institute Sdn Bhd economist Peck Boon Soon said the manufacturing sector could contract 17% year-on-year based on the figures for industrial output released in January and February.

He expects the economy to contract 5.3% year-on-year in the first quarter and 3.5% for the full year.

“We believe the services sector may only see a 0.5% growth as private consumption falls due to rising unemployment in manufacturing,” Peck said.

For the construction sector, he said the drop in property development activity would likely drag the sector down to minus 2%.

Meanwhile, Citigroup Inc Asia Pacific economics and market analysis vice-president Kit Wei Zheng said there were some signs of stabilisation in the February statistics for external trade and industrial output.

“While year-on-year there is a contraction, quarter-on-quarter there is a moderation in the slowdown,” he said.

Kit forecasts the economy to contract between 2.5% and 3% in the first quarter and 1.5% this year.

On the services sector, he said it could probably manage a slight increase although trade-related services would take a hit.

“My own sense of it is that we’re approaching an inflection point as we see a stabilisation in exports,” Kit said.

Kenanga Investment Bank Bhd economist Wan Suhaimi Saidi said consumer demand in the United States would have to pick up significantly before there was any improvement in growth numbers.

The United States was Malaysia’s third-largest trading partner in February, according to the Statistics Department.

Wan Suhaimi forecasts the economy to contract 2.6% in the first quarter and to grow 0.6% full-year, premised on a recovery in the second-half.

United Overseas Bank Ltd economist Ho Woei Chen said although recent economic indicators had shown a moderation in the pace of declines, it was still too early to tell whether the numbers would hold up.

She expects the economy to contract 2.5% in the first quarter and 2.5% for the full-year.