Economists remain optimistic based on country’s growth pattern

By CECILIA KOK
cecilia_kok@thestar.com.my

WHEN it comes to your personal view about the state of Malaysia’s economy, do you consider yourself an optimist, a pessimist, or perhaps, somewhere in between?

The difference? Well, an optimist is confident that the country’s economy would continue to expand healthily (never mind the prevailing indications of it moving at a decreasing pace) and achieve its year-end target of at least a 6% growth rate.

On the other hand, a pessimist will believe that external factors, such as the sovereign debt crisis in the euro region and the slowing growth of the Chinese economy, would upset Malaysia’s economic recovery, rendering the country’s economy to fall short of its growth target for 2010, and possibly face the danger of a double-dip recession.

The point is, people’s state of thought – not merely that of an individual but the collective sum of it – about the economy really does make a difference.

According to the late British economist John Maynard Keynes, confidence, or what he has famously coined as the “animal spirit”, is vital for any economy to thrive.

The element can help to accelerate or sustain the pace of economic growth because optimistic consumers will continue to spend their monies on goods and services and buy stocks, while confident businessmen will continue to invest for the expansion of their operations and increase hiring.

On the contrary, pessimism inhibits economic activity, as consumers will hold back spending and businesses will be unwilling to invest or hire.

Fortunately, as indices from private think-tank, the Malaysian Institute of Economic Research (Mier), show, optimists in Malaysia are still outnumbering pessimists in the country as at the end of the second quarter of 2010.

Mier’s indices for both the consumer and business sectors for the three months to June were still above the 100-point level that demarcates between optimism and pessimism.

The Consumer Sentiment Index (CSI) scored at 110.4 points, while the Business Conditions Index (BCI) stood at 119.6 points.

However, when compared against the first three months of the year, both indices had started to show signs of moderation. CSI lost 3.8 points due to concerns of inflation and as consumers’ income and employment expectations turned less bullish, while BCI lost 4.4 points, as businesses became less optimistic about the local economy.

Malaysia’s economic growth is widely expected to moderate from the second quarter onwards. Nevertheless, the growth trend is still a healthy one, as Affin Investment Bank chief economist Alan Tan puts it in his recent report.

Tan is confident that the country’s economic growth momentum can be sustained, albeit at a slower pace, due to the support from external trade and domestic demand from private consumption and investment.

In general, local economists are an optimist lot when it comes to the short to medium-term view of the Malaysian economy. This is especially so after taking into account the strong growth pattern that other regional economies registered recently.

Take China, the world’s third-largest economy, which managed to score a triple double-digit growth over the week. The country’s gross domestic product (GDP) for the second quarter grew 10.3% year-on-year (y-o-y), slightly slower than the 11.9% y-o-y growth in the first quarter and 10.7% in the fourth quarter of last year.

Even our neighbour Singapore managed to stage yet-another impressive growth rate. Its economy for the second quarter grew at an annualised 26%, compared with a revised 45.9% growth in the preceding quarter. This has prompted the country’s policymakers to revise their full-year 2010 GDP growth target to between 13% and 15%.

Singapore’s growth trend is a positive indication for Malaysia, economists say. This is because the country is Malaysia’s second major trading partner, and its strong growth would translate into higher demand for our goods.

According to Maybank Investment Bank, Malaysia and Singapore’s quarterly GDP have a high positive correlation coefficient of an estimated 0.82. This means Malaysia’s economy tends to move in tandem with that of Singapore.

Malaysia will only announce its second-quarter GDP numbers next month. Thus far, economists are expecting to see a growth rate of around 7.5% to 8.5% for the quarter.

Official forecast for the country’s 2010 full-year growth is 6%, while private-sector economists have a more bullish view, with expectations of up to 8.5% GDP growth for the full year.

Staying in the competition

The region’s robust growth may continue to provide support for Malaysia’s economy. But ultimately, the country will still have to tweak the local environment to strengthen its economic fundamentals and remain competitive.

That’s the goal of the New Economic Model (NEM), whose complete revelation is still pending. Part 1 of the NEM was unveiled in March, while the much-awaited Part 2 of the major roadmap for the country is expected to be revealed by the third quarter of this year.

Needless to say, as Asia continues to lead the global growth, more emerging-market economies in the region are blossoming and rising ahead.

Such is the case for Indonesia and Vietnam, which banking giant HSBC Holdings recently called “the new stars behind powerhouses China and India”.

The International Monetary Fund expects the Indonesian economy to grow 6% this year, and a little more than 6% in 2011, while the Vietnamese economy is expected to grow 6.5% this year and 6.8% in the following year.

Economists warn that the regional competition is becoming increasingly intense due to the rise of these new emerging economies.

Hence, Malaysia cannot afford to remain complacent, lest it loses out again in the race towards economic prosperity, and risks being superseded by its regional peers, some of which are presently deemed to be less developed.

For instance, based on data from the World Bank, one can say that the economies of Malaysia, South Korea, Taiwan and Singapore were almost at par in the early to mid 1970s. The four economies had gross national income (GNI) per capita below the US$5,000 level. But now, the three economies are so far ahead of Malaysia. Their economies have surpassed the GNI per capita level of US$15,000, while Malaysia is still trapped at the middle-income level with GNI per capita of around US$7,000.

“It’s a tough spot from which we need to break out,” an economist with a local investment bank says.

The intentions to boost private investments to drive the country’s economic growth are evident, he contends. But what’s more important is that such intentions are translated into clear action plan and implemented smoothly.

“We need to create a conducive environment for private investments to grow... such effort goes beyond having attractive incentive schemes,” he explains.

Policy consistency and clarity, economic direction, cutting down of red tape, and stamping out corruption are other measures deemed important by many economists to further promote Malaysia.

And in terms of attracting the right skills, Talent Corp, which will be launched next year, will indeed have a big responsibility on its shoulders to ensure the success of the objective, the economist tells StarBizWeek.

So, even as Malaysia has recovered from the effects of the global economic crisis, and seems highly likely to manage a healthy growth trajectory over the next one to two years, sustaining such pattern for stronger growth for a longer period is even more crucial. And it starts with laying the right foundation now.