Malaysia's GDP Growth Falters to 4% in Q2 2011

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Q2 GDP moderates to 4%

By CECILIA KOK cecilia_kok@thestar.com.my

KUALA LUMPUR: Malaysia's economic growth moderated to 4% year-on-year (y-o-y) in the second quarter (Q2) of the year, after a revised growth of 4.9% y-o-y in the preceding quarter due to a weaker external environment.

The country's gross domestic product (GDP - goods and services produced within the country) growth rate for the three months to June, however, was higher than market expectations of 3.6% based on Bloomberg's poll of 16 economists.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said Malaysia's overall economy continued to be sustained by healthy domestic demand and strong exports of commodity and resource-based products amid slower global growth.

Domestic demand in Malaysia during the second quarter grew 5.2% y-o-y due to sustained growth in private spending.

Private consumption remained healthy amid robust labour market conditions, while private capital spending was sustained by expansion in production capacity and investment in new growth areas.

“Based on the growth we have achieved so far, it is likely that Malaysia's GDP for the full year would expand by at least 5%,” Zeti told a press conference here yesterday. She said it was still too early to revise the country's GDP growth forecast.

Malaysia's GDP for the first half of the year grew 4.4% y-o-y, compared with 9.5% y-o-y in the corresponding period last year. The official GDP growth target for the year was between 5% and 6%.

If there was a need for revision, it would be done during the Budget period in October, Zeti said, while emphasising that the central bank remained watchful and was closely monitoring the global economic developments.

“If we have a situation where the United States and Europe slipped into a recession or any other trigger factors that could result in the disruption in international financial markets, we will have to make a reassessment,” Zeti said.



Bank Negara highlighted the fact that global growth had moderated since the second quarter of the year due to a various factors, including fiscal issues and structural weaknesses in advanced economies and global supply chain disruptions stemming from the March 11 earthquake and tsunami in Japan.

These challenges, as the central bank revealed, were reflected in the slower growth in Malaysia's manufacturing sector at 2.1% y-o-y during the second quarter, compared with 5.5% in the preceding quarter.

Zeti conceded the downside risks to Malaysia's external demand had increased following heightened uncertainties in external demand. In the immediate term, she said, fiscal uncertainties and structural weaknesses in advanced economies would continue to challenge global growth and increase volatility in global financial markets.

“Categorically, we have to say we have a strong domestic economy... our fundamentals are strong enough to support our economy,” Zeti said, stressing that a contraction of Malaysia's economy was not to be expected despite the deepening euro debt crisis and sluggish growth in the United States.

CIMB Research, in its report yesterday, expressed optimism that Malaysia's economy would remain in the positive growth trajectory. The research house said the stepping up of government capital spending in the second half and the continued vigour of private capital spending would sustain the momentum of the country's economy.

“We maintain this year's GDP growth estimate at 5%, implying an average growth of between 5% and 5.5% in the second half, compared with 4.5% in 1H11,” CIMB Research said in its report.

Bank Negara also highlighted that the country's inflation, as measured by the consumer price index (CPI), had eased marginally last month. CPI for July gained 3.4% y-o-y, compared with 3.5% y-o-y.
Zeti said Malaysia's full-year CPI would remain within target of 2.5% to 3.5%.

How did the world get so fixated on GDP?

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GDP growth remains central to economic policy, yet life in flatlining Japan remains rather better than it does elsewhere

By James Meadway guardian.co.uk,

Mining on the Pacific island of Nauru shows how 'a few years of apparent prosperity can be bought at immense future cost'. Photograph: Torsten Blackwood/AFP/Getty Images

The economic news grows daily more grim. Across the developed world, once-optimistic forecasts for growth are being revised downwards. Financial markets, sensing trouble ahead, are in a tailspin. Debates over the future centre on a single metric – that of GDP.

Gross domestic product was not always with us. Created in the 1930s, and despite the warnings of its pioneer, it rapidly assumed centre stage in economic policymaking.

Growth could now be measured targeted through policy. For the right, it would be a simple gauge of national economic virility. For the left, it offered the more subtle appeal of an end to disputes over the distribution of wealth.

By focusing not on the size of the slices, but on the size of the pie, an interminable conflict between capital and labour could seemingly be resolved. The case was put most forcefully in the Labour politician Anthony Crosland's influential book The Future of Socialism. Growth would deliver the public goods – secure employment and a functioning welfare state.

That consensus has now held for 50 years or more. Yet mounting evidence suggests that GDP growth does not register many of the things people actually care about. It is a record of some aspects of economic life, but it fails to capture wider social needs and demands. Health, quality of life and inequality play no part in its measurement.



Rising, falling GDP

There is a growing consensus that rising GDP since the mid-1970s in the US and the UK has become disconnected from reported measures of wellbeing. We know that falling GDP produces misery, as unemployment rises and incomes collapse. But the reverse does not apply. Higher output does not necessarily mean happier people.

Even growth's blunt promise of material prosperity is failing. GDP in the UK increased by 11% from 2003 to 2008. Over the same period, median real incomes stagnated. The economy boomed, but few shared in its rewards. Living standards were maintained through unsustainable debt. As we crawl back into recession, the majority will find those rewards still harder to come by – even if a minority continue to grow fat.

And environmental damage has no impact on GDP's progress. A few years of apparent prosperity can be bought at immense future cost. The tiny Pacific island of Nauru once enjoyed the highest per capita living standards of anywhere in the world. Its plentiful supplies of phosphate rock, in demand for fertiliser, had been strip-mined since the 1900s. But as the phosphate dwindled, so did incomes. Nauru has been reduced to providing a detention centre in return for Australian aid money.

Environmental limits can and will bite. From declining fish stocks to the overwhelming threat of climate change, there are physical limits to our economic activities. GDP registers none of this.

 Lessons from Japan

We need to change how we think about the economy. Japan has now laboured through nearly two decades of flatlining GDP. A miracle of growth transformed it from defeated power in 1945 to the world's second-largest economy. Then, in the 1990s, the growth stopped, never to convincingly return. Yet living standards in Japan are among the highest in the world. Unemployment is half that of the US; life expectancy five years longer. Average real incomes are the same as Germany's, and inequality lower. Japan's environmental impact, particularly through the import of raw materials, remains high. But it is not simply the economic basket case it is often presented as.

The old consensus needs breaking. We need to fixate less on growth alone.

The government recognises this much, aiming to create a national measure of wellbeing. But this accounting exercise is completely disconnected from economic practice. The coalition has a near-mystical belief in the power of the free market to deliver growth. It believes the national debt should be run down, clearing the way for a return to prosperity as the economy "rebalances". Purposeful government intervention is not needed.

The coalition's lack of success is a tribute to its lack of strategy. Rebalancing the economy away from debt-fuelled consumption and bloated financial services is a fine aim. It needs policies to match. Austerity does not just blight individual lives – Ireland has shown how it cripples whole economies as demand drains out of the system. So public spending, the bedrock of an economy in recession, must be held steady.

A genuine rebalancing, however, cannot come from maintaining status quo. The thinktank New Economics Foundation has begun an ambitious modelling exercise that seeks to show how a low-carbon economy can also deliver social justice.

Action, though, is needed now. Economic policy must be broadened towards meaningful goals – creating secure, well-paid jobs; minimising environmental damage. Where private investment is failing, with business expenditure sliding again last quarter, government should be prepared to step in.

A new industrial strategy could match social objectives with credible interventions, supporting the industries of the future. Or we will be left to chase a statistical chimera.

Debt-consolidation plans vital

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MAKING A POINT By JAGDEV SINGH SIDHU

IT'S easy to picture the worst when the news around us is not savoury at all.

The platter for such troubles will include the second-quarter slowdown induced by the earthquake and tsunami in Japan. Output around the world has been shaken by the ramifications of the supply shock from Japan.

Then there is the report card on the US Federal Reserve's second round of quantitative easing (QE2). For many, QE2 really did not help the foundation of the economy. Unemployment is still sticky and there is still weakness in the housing sector but the stock market and commodities boomed with cheap liquidity flooding the market.

Inflation jumped as raw material prices surged and that, in effect, robbed a lot of people of purchasing power.

Looking at Greece, one has to assume a default is a certainty and is just a question of time. In fact, the CEO of Pimco, the world's largest bond fund, expects that to happen and many, too, agree looking at the economic structure of Greece.

Despite the gloom, the prognosis for the global economy really has not changed much.

The International Monetary Fund (IMF) expects the world economy to grow by 4.3% for 2011, which is 0.1% lower than previously estimated.

It has cut its growth forecast for the United States to 2.5% in 2011 from an earlier estimate of 2.8% in April.

IMF's Olivier Blanchard, who is its economic counsellor and the director of the research department, said predicting the economic direction for the US was too early but felt the slowdown of the US economy was more of a bump on the road than something worse.



“But assuming that oil prices are going to stay roughly stable, which is what the markets seem to predict at this point, we think that spending by consumers and firms should remain steady in what is, however, very clearly a very weak recovery. This has been a longstanding forecast of ours. The recovery in the US is a very weak one,” said Blanchard last week.

The outlook for Japan saw the biggest change as the earthquake and tsunami are expected to see that economy contracting by 0.7% this year from an earlier forecast of a 1.4% growth made in April.

The IMF has stuck to its projections for the two most populous countries, estimating growth for China and India to register 9.6% and 8.2% respectively this year. Those estimates were unchanged from April.

With troubles in Greece hogging international financial news and people wondering about the repercussions of a default by Greece on financial institutions in Europe and the US, the IMF said the risk of contagion was real and could derail European recovery and even that of the world but thought advanced economies, in which Europe features prominently, was forecast to grow at 2.2% for 2011, down 0.2 percentage points from earlier thought.

Its forecast for emerging and developing economies is 6.6% for 2011, which is up 0.1 percentage points since April.
While forecasts are relatively flat, the IMF did say risks were visible and highlighted the debt issue not only in Europe to be one of the hazard points for the global economy.

It feels debt-consolidation plans, even in the US, needs to be in place for the medium term to avoid higher borrowing costs and slower economic growth in the future.

In Asia, asset and price inflation are seen as the key risks and it feels countries with large current account surpluses should allow their currencies to appreciate.

“All countries must choose the right combination of instruments at their disposal fiscal, monetary, macro prudential to slow their economies in time and avoid costly boom-bust cycles,” said Blanchard.

Whether the bad news translates to most people's economic nightmare is something most businesses and investors are keeping an eye out for. It would appear that, for now at least, prospects and risks are balanced.

Deputy news editor Jagdev Singh Sidhu has filled nearly every large container at home with water to prepare for a dry couple of days but water is still flowing strongly from the main pipe.