First, Malaysia is a small open economy that is extremely dependent on trade. Because the main export markets are in a severe global recession, we will see sharp declines in export demand in 2009 and a slow recovery in 2010.
Malaysia is a large exporter of high- and medium-tech equipment. WIS forecasts a 7% decline in real sales for Malaysia's computer and office machinery industry and 6% decline in semiconductors, circuit boards, and LCDs in 2009. In fact, all high- and medium-tech equipment industries began to see a dropoff in demand in the fourth quarter of 2008 mostly because of weakening demand from their key export markets: the United States and Europe. For example, in the United States, real business investment for information-processing equipment declined 7.8% quarter-over-quarter in the fourth quarter of 2008 and it is expected to decline another 11.0% in 2009. We expect the United States and China will lead, and even drive, much of the resurgent growth in computer and communications equipment demand in late 2009 and 2010. European and Japanese growth will lag, but it will contribute to industry demand.
Tech-equipment industries' profits in Malaysia will suffer this year, posting 14–15% declines as prices are sliding. Deflation is resulting from price competition and quality adjustments. Downward pressure from the current economic malaise will only serve to accelerate the declines.
Commodity exports contribute about 17% to total exports in Malaysia, and have also been hit by sharp reversals in commodity prices, as demand destruction has ensued globally. Timber, palm oil, and rubber are abundant, and the country is the largest palm oil producer in the world. The country is also a net oil exporter. Oil and gas mining real sales are expected to decrease 3.0% in 2009 while nominal profit for this industry will post the largest decline (106%) compared with other industries after a 38% increase in 2008. This projection is mostly due to sharp declines in energy prices.
Second, domestic manufacturing is expected to decline as well, but not as steeply as export-oriented industries. This is because demand for capital goods has weakened. Fixed capital formation declined 10.2% in the first quarter of 2009, reversing the positive 3.1% growth recorded in the last three months of 2008 and showing a collapse of local business investment activity. Tight credit conditions have further exacerbated the decline in private capital expenditure, as firms cut spending plans amid the rapidly deteriorating economic outlook.
As a result, industrial machinery and equipment, the consumer sector, and construction will all show weakness. Real sales in durable manufacturing are expected to drop 9% in 2009 following 4% growth in 2008. We predict a strong rebound going forward into 2010–11. For example, real sales of industrial machinery and equipment will grow 3.0% in 2010 and 4.5% in 2011 after a sharp 11.0% decline in 2009.
The outlook for the consumer sector is bleak as well. Declining private capital expenditure will result in rising unemployment, decreasing confidence, and thus depressing consumer spending. Real sales of consumer-oriented industries are expected to fall 4% in 2009, compared with a 6% increase in 2008 and a 4% growth forecast for 2010. The industries that are most affected are motor vehicles, furniture, domestic appliances, textiles, apparel, and leather.
It should be noted that an aggressive policy response will soften the slowdown coming from the domestic side. The central bank has already cut interest rates to 2% in February and the government has announced a major fiscal-stimulus package (equivalent to some 9% of GDP) to help minimize the downturn in the domestic economy.
Third, services have remained the main driver of growth on the supply side, with activity increasing 6% in aggregate in 2008. We expect the aggregate services sector to grow 3% in 2009 before accelerating to 5% in 2010.
Government spending will help public administration and defense to post robust growth in 2009, and spending on healthcare and education will help these sectors grow 4–5% each in 2009–2010. Finally, growth in telecommunication services will hold its own at 3% in 2009.
Over the long term, however, the outlook for the Malaysian economy is clouded by a few trends.
- The flow of foreign direct investment is shifting away from Malaysia into the lower-cost manufacturing countries of Vietnam, China, and Indonesia, as Malaysia features higher labor-market rigidity.
- Malaysia's economy is "over-reliant" on exports to the United States, Europe, and other countries/regions. Large external balances are playing a crucial role in the current synchronized global recession. Huge trade surpluses in certain emerging economies and huge trade deficits in developed countries are fueling global instability.
- We fear that the developed countries' desire for substantial current-account/trade deficits will disappear. Given the de-globalization process, lower external financing, and lower international trade, Malaysia will find it more difficult to sustain the growth rates seen over the past five years. Reconsidering long-term strategies directed towards developing the tradable goods sector and focusing more on industrial policies for nontradables will be one of the trends in the changing world.