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Sunday, October 28, 2007

MIER cuts GDP outlook for 2008

KUALA LUMPUR (The Edge Daily, 25/10/2007): The Malaysian Institute of Economic Research (MIER) is maintaining its gross domestic product (GDP) growth forecast for Malaysia at 5.7% this year but has cut its forecast for next year to 5.4% from 5.8%.

The private sector think-tank’s GDP forecast for 2007 was below the government’s expectations of 6% growth. For the third quarter of 2007, it expects GDP growth of 5.5% to 5.6%.

“The US subprime turmoil is making global growth prospects cloudier. Stabilising the ringgit and minimising the adverse impact of a strong currency on Malaysia’s export competitiveness is likely to be a challenge over the near term,” it said in its third quarter Malaysian Economic Outlook.

In the first half of 2007, the economy expanded 5.6%, driven by private consumption and government spending. Robust expansion in the services sector buffered the sluggish manufacturing sector which was weighed down by weak demand in the electronics and electrical sector.

Following the International Monetary Fund’s (IMF) downward forecast revision for the world economy, MIER lowered Malaysia’s GDP growth forecast to 5.4% from 5.8% barring a recession in the US economy.

“Although domestic demand will be propped up somewhat prior to the general elections, the global economy could grow at a slower pace owing to the fallout from the sub-prime turmoil.

The spurt in oil prices is another factor that has the potential to derail the global economy,” it said.

Executive director Datuk Dr Mohamed Ariff Abdul Kareem said yesterday prevailing high oil prices were expected to remain due to the tensions in the Middle East. Light crude oil prices hit a record high of US$90 per barrel last week.

On the ringgit, he expected it to strengthen to RM3.35 against the US dollar by end-2007 and RM3 by end-2008, underpinned by sound fundamentals and a broad-based economy.

He added the US dollar would continue to weaken against the other major currencies. At 5pm, the ringgit was quoted at 3.370 against the greenback.

On the possibility that Bank Negara Malaysia (BNM) could allow offshore trading of the ringgit, Ariff said this move would allow market forces to push the ringgit closer to its equilibrium level, giving the currency room to strengthen further.

Offshore trading would also open up investment activities, where Malaysian capital and the ringgit could “go into accounts abroad”, he said. “We hope BNM will allow it, it should happen early next year,” he said.

On the inflation outlook, MIER estimated the inflation rate in 2007 at 2.2% and will increase to 2.7% next year.

“Going into 2008, the inflation rate may rise dramatically if the government decides to cut oil and gas subsidies and raise the toll rates, and if the demand for fare hikes from public transport operators are granted. The surge in global oil prices to US$80 per barrel is putting pressure on the subsidies that the government has to bear,” it said.

On the overnight policy rate (OPR), MIER said the central bank was likely to maintain it at 3.5% for the rest of the year, although the threat of higher inflation from a cut in oil and gas subsidies and a hike in toll rates could lead to slightly higher rates.

Unemployment in 2007 and 2008 was projected to be maintained at a low 3.3%. Mohd Ariff added although the unemployment rate was stable, the structural transformation occurring in the economy was resulting in the creation of less albeit higher quality jobs.


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