Malaysia's economic contraction eased in the third quarter, in line with the global economic recovery, suggesting that the economy is likely to recover from the recession soon.
Gross domestic product fell 1.2% year-on-year in the third quarter after falling 3.9% in the second quarter, the Bank Negara Malaysia said Friday. Economists were looking for a decline of 2%.
The central bank said the growth impetus emanated mainly from domestic demand, as a result of stronger private consumption and higher public sector spending. The Malaysian economy has been contracting since the first quarter of 2009, when the GDP declined 6.2%.
Recovery in Malaysia is undeniably taking place and nicely supported by a resilient domestic demand and improving external economic conditions, the Singapore-based DBS Bank said. Malaysia's external driven sectors will continue to benefit from the global recovery process, the bank said, and these positive effects could gradually broaden out to the domestic segments of the economy.
"Domestically, although the Federal Government will be working on a tighter fiscal target next year, benefits of this year's aggressive fiscal policies (including the two stimulus packages) will likely spill over to 2010," DBS economists said in a note.
Malaysia could return to moderately high growth in 2010, the World bank said in a report on Wednesday. The lender expects the economy to contract 2.3% this year, but grow 4.1% in the next year.
"Managing the recovery will be a delicate balancing act," the World Bank said in its new report for the Malaysian economy. "Withdrawing policy support too early runs the risk of choking off the recovery, whereas extending support for too long could hamper efforts to reduce government deficits and debt accumulation."
Final consumption expenditure expanded further by 3.3% on-year in the third quarter after registering a marginal growth of 0.6% in the second quarter. Growth in private consumption expenditure accelerated to 1.5% from 0.5% in the last quarter. That was driven by improved labor market conditions, lower price levels and higher spending for the festive season.
Meanwhile, government final consumption expenditure grew at a stronger pace of 10.9%. The strong public investment provided support to gross fixed capital formation, which contracted at a more moderate pace of 7.9% compared to a 9.6% drop in the second quarter, as private investment remained subdued.
The external sector continued its negative momentum with both exports and imports declining by 13.4% and 12.9%, respectively. Deceleration in exports was due to lower demand for electrical and electronics products and petroleum products in the external market.
The next several quarters should benefit from continued improvements in exports and private consumption, the World Bank report said. "Better export performance will fuel private consumption, as will the lagged effects of recent stimulus packages."
Meanwhile, the contraction in imports was due to the reduction in the imports of intermediate goods and capital goods. The decline in the manufacturing sector has narrowed to 8.6% in the third quarter from 14.5% in the previous quarter.
Looking ahead, the central bank said the domestic economy is set to register positive growth in the months ahead. "The Malaysian economy has exhibited stronger signs of improvement in the third quarter and evidence suggests that domestic economic activity is gaining strength."
The central bank said the pace of economic recovery is expected to gain momentum, as business and consumer sentiment improve further. In addition, the gradual improvement in the global economy will continue to contribute positively to the recovery of the domestic economy. Moreover, the central bank said the country's financial sector remained resilient with strong capitalization, high asset quality, ample liquidity and continued profitability in the third quarter.
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