Malaysian Economic Outlook, 1998-1999

Abstract

The International Monetary Fund projects world economic growth in 1997 and 1998 at 4.2 per cent and 4.3 per cent respectively (1996:4.1%). The United States economy continued to expand impressively for the sixth consecutive year, accompanied with low inflation. In Europe, economic growth was more wide-spread and is expected to gain further momentum. The state of the Japanese economy, however, is quite depressing with the recent collapse of Yamaichi adding to the problems. More disturbing news comes from the worsening economic and financial crisis in East Asia. South Korea, the world's eleventh largest economy, has already sought monetary aid from the IMF. On the domestic front, real Gross Domestic Product (GDP) in Malaysia is estimated to grow by 7.8 per cent in 1997. MIER's surveys of the manufacturing sector and consumers in the third quarter of 1997, however, indicate that the business community and consumers are noticeably less optimistic about the future and feeling tentative following the sharp depreciation of the ringgit and the related downturn in the Kuala Lumpur Stock Exchange (KLSE). On the external trade front, data up to the month of September indicate a lower merchandise trade surplus this year, estimated at RM8.4 billion. The current account deficit in 1997 is estimated at RM15.3 billion. Inflation is anticipated at 3.0 per cent, while the unemployment rate is projected at 2.5 per cent in 1997. Export growth, though, is trending steadily upward and this augurs well for economic prospects in 1998. The recovery in the global electronics industry will benefit Malaysia. Growth in imports, although forecast to pick up in 1998, will however lag behind that of exports. Some domestic- The deferment of several large substitution is anticipated, especially in consumption goods. infrastructure projects with high import content will lessen the pressure on imports growth. But the higher cost of foreign currency denominated intermediate inputs will be a cause of concern, to the extent that domestic-substitution is limited. Overall, we forecast the merchandise balance to show stronger surpluses in 1998 and 1999, benefiting from a weaker currency and adjusting to a lower growth in the economy. The merchandise surplus is projected at RM11.6 billion in 1998 and RM14.9 billion in 1999. The current account balance is forecast to register deficits of RM12.7 billion and RM11.0 billion in 1998 and 1999 respectively. In 1998, we forecast real GDP growth at 5.8 per cent, picking up momentum in 1999 with a growth of 6.1 per cent. The export sector will continue to recover. Export of goods and non-factor services is forecast to grow by 11.5 per cent, following 7.0 per cent growth in 1997. In 1999, exports are anticipated to grow by 12.1 per cent. The better performance in export-oriented manufacturing sub-sectors will provide some boost for private investment in 1998. Private investment is projected to expand by 4.4 per cent in 1998, down significantly from a growth of 10.5 per cent estimated for 1997. It is forecast to recover to a growth of 7.4 per cent in 1999. Although lower economic growth is expected for 1998, nevertheless the labour market is not anticipated to see any sharp downturn and wages will remain fairly stable. This would lend some support to private consumption, which is forecast to expand by 2.9 per cent in 1998, down from 5.2 per cent growth in 1997. For 1999, private consumption is forecast to edge up to a 4.6 per cent growth. In tandem with the better growth expected for exports, imports will pick up in 1998. Import of goods and non-factor services is forecast to rise by 9.1 per cent following a 7.5 per cent growth in 1997. Imports will rise by 10.8 per cent in 1999. The higher cost resulting from a weaker ringgit will see inflation edging up in 1998 before moderating slightly in 1999 when adjustments have been more fully made. We forecast the inflation rate to be at 5.3 per cent in 1998 and 4.0 per cent in 1999. The unemployment rate is projected at 2.7 per cent for both these years.