Malaysian Economy expands by 4.1% in second quarter

(Thursday August 25, 2005).  THE Malaysian economy expanded by 4.1% in the second quarter of this year compared with a growth of 5.8% in the first quarter but the central bank believes that full-year growth projection of between 5% and 6% is still achievable. 

The rate of growth, which was below market expectations, was hampered by a high base effect, as the economy grew by 8.1% in the second quarter of last year. 

“I would not draw a conclusion that we are in for a major economic slowdown,'' Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said. Malaysia's growth prospects are tied closely to the economic performance of its major trading partners, which has so far showed some resistance to skyrocketing crude oil prices. 

“Indicators are for domestic demand to remain favourable. The leading indicators, loans growth, demand for capital goods, foreign direct investment, trends in consumption demand and performance of our major trading partners (remain favourable), and on the basis of this, we expect the outlook to improve in the second half of this year,'' she said. 

“Growth for the first half is 4.9% and, with an improved performance, the forecast could be achievable.'' 

She was speaking at a media conference on the performance of the Malaysian economy during the second quarter in Kuala Lumpur yesterday. 

For the second quarter of the year, slower growth was experienced in all major economic sectors, except for construction, compared with the first quarter. 

The services sector grew by 5.4% and contributed 3.1 percentage points to gross domestic product (GDP) growth, underpinned by strong consumer spending, travel and business activities. 

The manufacturing sector expanded by 3.2%, sustained by growth in the resource-based industries as well as improvements in the electronics industry. 

Production by export-oriented companies grew by 4.1% in the second quarter but production by domestic-oriented businesses fell by 1.3%, primarily due to a drop in production by the fabricated metal and the construction-related industries. 

Value-added in agriculture expanded by 3.2%, mainly due to strong expansion in palm oil production. Mining declined by 1.6% due to a reduction in oil production for maintenance purposes. 

The rate of contraction in construction improved to 2% compared with 2.4% in the first quarter. 

However, growth in all segments of the economy for the April-June quarter fell when compared with the second quarter of last year. 

“Private consumption expanded by 7.4% in the second quarter with stable income and employment condition amidst export earnings and competitive credit market conditions,'' she said. 

Consumption by the public sector contracted by 2.4%. 

Zeti said private investment indicators also showed positive trends, particularly in the import of capital goods, increase in foreign direct investment (FDI) flows and expansion of lending to the business sector. 

Gross fixed capital formation increased by 6.7% in the second quarter. 

“Most of the forward indicators suggest that private consumption and investment activities are expected to remain favourable in the second half of this year,'' she said. 

Inflows of FDI increased by RM8.7bil during the second quarter and 43% of such inflows were channelled to the oil and gas sector mainly in the form of loans extended to subsidiaries of foreign companies in Malaysia. 

Zeti said 29% of FDI was to the services sector, particularly in the financial, insurance and business services and 15% was to the manufacturing sector, mainly in petroleum products, photographic and optical products as well as electrical and electronic sub-sectors. 

Overseas outflow amounted to RM2.6bil and portfolio inflows were RM4.5bil for the second quarter, much of that headed primarily to private debt securities. 

She said the ringgit's exchange rate would be determined by economic fundamentals and Malaysia would look to maintain stability of exchange rate with trading partners so that it continued to facilitate trade and investment. 

Zeti said the central bank was satisfied with the performance of the ringgit since it was de-pegged from the US dollar.