http://asia.cnn.com/2001/BUSINESS/asia/ 11/19/malaysia.gdp.biz/index.html

Malaysia likely 'already in recession'

By staff and wire reports

KUALA LUMPUR, Malaysia -- Malaysia is already in recession and the economic slump could get worse in the next six months as consumption slows, according to investment bank Goldman Sachs.

"Over the next six months, we believe there will likely be confirmation that this recession is deeper than that of 1998," Goldman Sachs analyst Adam Le Mesurier wrote in a report obtained by Reuters Monday.

That view is supported by other economic commentators, including IFR's Asia-Pacific Economic Monitor, which said in its weekly review released Monday that the Malaysian economy is heading into its fourth negative quarter.

Even the more optimistic observers expect the September and December quarters to be negative.

Joining other Asian economies

That would confirm Malaysia has joined other Asian economies Japan, Singapore and Taiwan in recession. Hong Kong is also a candidate for contraction this year.

Malaysia's third-quarter GDP figures are due to be unveiled on Thursday.

Official government figures show gross domestic product (GDP) grew 0.5 percent in the second quarter and 3.1 percent in the first quarter, well below the 8.5 percent growth achieved in 2000.

But these figures are not seasonally adjusted, leaving economists split on whether the country has already entered recession.

Goldman Sachs and IFR are among those who consider Malaysia to be in a recession.

Largest swing on record

"On a nominal growth basis, the swing in nominal GDP growth is already the largest on record," Goldman Sachs said in its latest review of the country's economy. Malaysia's GDP contracted 7.5 percent in 1998.

IFR said the Malaysian government had been able to deny recession because it did not release seasonally adjusted figures.

IFR said Malaysia's claim that its economy had stayed out of recession was implausible. Its own rough seasonal adjustment suggested a 1 percent quarter-on-quarter fall in the March 2001 quarter, and a more than 4 percent fall in the June quarter.

"Q3 is likely to see a similar 4+% slide as the impact of slumping exports and manufacturing spreads through the broader economy," IFR said.

Goldman Sachs has cut its forecast for Malaysia's GDP to a 1.0 percent contraction in 2001 from 0.4 percent contraction previously, and to 1.0 percent growth in 2002 from 2.3 percent growth previously.

IFR said it expected Q3 GDP would show a 0.7 percent year on year contraction.

Government intervention the savior

Last week, the Malaysian Institute of Economic Research said the country would see growth of 0.3 percent this year, despite a second half contraction of 1.2 percent.

Although there would be two quarters of contraction, government intervention would head off a full-blown recession, the institute said.

It is predicting growth of 3.2 percent in 2002 but stressed that the outlook was uncertain.

Another commentator, IMA Asia, said in its November outlook for the region that because Malaysia had done a lot to clean up non-performing loans and restructure its finance sector, it had the potential to recover quickly and to sustain strong medium-term growth than neighbors Thailand and Indonesia.

IMA is predicting GDP growth this year will be 0.5 percent, rising to 3.5 percent in 2002.

Goldman Sachs noted that the main difference between Malaysia's situation now and the 1997-98 recession is the degree of the export sector's downturn," Goldman Sachs said.

"The 1997-98 period represented a pause in the export sector's expansion rate, whereas today exports are contracting significantly," it said.

Slowing consumption, as measured by factors including car sales and house mortgages, would lead to higher deflationary pressures on the economy, making it harder for the government to abandon its fixed exchange rate regime if it needs to, the research house said.

Consumption likely to slow in months ahead

It said up till now, strength in domestic consumption, driven by government pump-priming and interest rate cuts, has helped cushion the impact of the sluggish export sector.

But consumption growth is likely to slow over the next six months as job losses sap consumer confidence. That, in turn, will add to deflationary pressures, Goldman Sachs said.

"We believe this increased deflationary pressure will intensify the political debate on the wisdom of the pegged exchange rate," it said.

The ringgit has been pegged at 3.8 per U.S. dollar since September 1998, a regime Goldman Sachs says limits the central bank's policy responses to address deflation.

Reuters contributed to this report.