THE results were out late Wednesday evening. Fourth quarter gross domestic product (GDP) posted a growth of 5.6 per cent while full year 2002 GDP expanded by 4.2 per cent.
“It is obvious that momentum has slowed. Going forward, other areas such as services and private consumption need to be boosted,” says OSK Research economist Lee Soo Kai.
Nevertheless, Lee is of the opinion that the results were marginally better than expected. He feels that growth in the fourth quarter was powered by an unexpectedly strong capital spending while private consumption edged up slightly.
“Private consumption continues to underpin GDP growth. It increased by 4.5 per cent in the fourth quarter as consumer spending was higher towards the year-end concurrent with the festive season,” says CIMB Securities economist Lee Heng Guie.
Equally strong contributors were the robust services and mining sectors. The services and mining sectors picked up to keep the economy's quarterly growth momentum intact despite slower growth in the manufacturing, agriculture and construction sectors.
Most economists contacted agree that full year GDP of 4.2 per cent was on account of a turnaround in exports.
It was also supported by a stronger growth in domestic demand due to stronger consumer spending as well as a turnaround in investment activities.
Economists are expecting the official 2003 GDP forecast of 6 per cent to 6.5 per cent to be revised downward when Bank Negara releases its annual report 2002 next month.
CIMB's Lee is expecting real GDP growth for 2003 to average at 4.3 per cent while OSK's Lee is looking at 5 per cent. Other economists contacted are predicting growth of 4.5 per cent to 5 per cent.
Therefore, what do economists see in store for 2003? With the outlook still clouded by war tensions in the Middle East as well as the fragility of the United States (US) economy, what would be the driving factors underpinning growth in 2003?
“Definitely consumer spending and sustained firm commodity prices,” says an economist from a local research.
He goes on to say that other domestic drivers would come from the services, manufacturing, construction and the agriculture sectors.
“I expect a softer first half before growth momentum picks up in the second half for a stronger 2004,” says the economist.
CIMB's Lee agrees and he also expects Malaysia's economy to remain relatively weaker in the first half of 2003 before it stages a firmer ground in the second half of 2003 in tandem with the strengthening of global demand for electronics.
The service sector will also yet again be a crucial provider. Over the last two years, it had outperformed other economic sectors, and economists are expecting this trend to continue this year.
On the pump-priming front, RM22 billion contract jobs have been awarded and are now in construction. Another RM31.6 billion worth of contract works is expected to be implemented over the next 12-18 months.
Intra-regional trade growth is also expected to be another reliable source of growth.
Last year, Malaysia's fastest growing export markets were regional markets namely China, and Hong Kong, while export growth to other regional markets like South Korea and Taiwan also outpaced export growth to the US.
“The commencement of the Asian Free Trade Area (Afta) should help boost intra-trade this year,” says the economist from the local research.
As for the downside risks in the Malaysian economy, they are mainly external. Some of these would include the worsening geopolitical factors such as the prolonged US-Iraq conflict and the terrorism backlash. Negative sentiment sometimes cause more harm than real fundamental weakness.
“Economic risk is rising and inventory correction is underway. Nevertheless, our 2003 GDP growth of 5 per cent is maintained but risk now tilts towards lower growth if global uncertainties exacerbates,” OSK's Lee emphasises.
Another rather pronounced risk factor would be the impact of higher oil prices on the domestic economy. Given that Malaysia is a net exporter of oil, for every US$1 rise in oil price, this will result in a gain of RM500 million.
However, a persistent rise in oil price to above US$30-US$35 per barrel could threaten to slow down Malaysia's export growth as higher oil prices could stifle the global economic recovery.
“Malaysia will not be spared from the impact of a global slowdown given its high degree of openness. The government is due to announce a growth stimulus package to sustain the economic recovery by end March 2003,” says CIMB's Lee.
Nevertheless, Malaysia's well- diversified economy puts it in a better position to weather the oil shock. Any consequent impact on domestic economy is not likely to be significant.
CIMB's Lee is expecting policy measures (to be announced by end-March 2003) to continue to focus on strengthening the domestic demand to soften the impact of a possible sharp slowdown in exports.
“The overall fiscal stance would be counter-cyclical and monetary policy will remain accommodative to reinforce fiscal measures to cushion the economy from a sharp slowdown,” says CIMB's Lee.
OSK's Lee is not ruling out a possible interest rate cut despite the statement from the Prime Minister that this would be unlikely.
“In our view, while the government continues to favour fiscal measures for pump-priming, there is clearly a limit to the extent of such pump-priming. With interest rate gap now favouring Malaysia, the country definitely has room to lower its intervention rate further,” OSK's Lee says.
A combination of both fiscal expansion and monetary easing provides the best reflation strategy to cushion the flagging external sector.