The slowing economy and a high base effect from the first half of last year will pose a stiff challenge to economic growth rates this year with a number of economists expecting growth rates to normalise to between 5% and 6%, matching official estimates, from 7.2% last year.
Domestic demand, although its rate of growth slowed from the third quarter to the fourth quarter of this year, would provide support to the performance of the economy in the first half of this year as exports, which did poorly towards the latter part of last year, should provide support in the final six months for the economy to reach its target for this year.
“It is slowing and the momentum has come off,'' CIMB Economic Research's chief economist Lee Heng Guie said of the economy heading into 2011 with growth rates falling in the latter part of last year.
Economists have said growth rates of 10.1% and 8.9% in the first two quarters were exceptional and a consequence of a low base from 2009 and a ramp up in production as businesses around the world started to replenish their inventory. Growth slowed to 5.3% and 4.8% in the third and fourth quarters of last year once that kicker wore off.
Lee said growth would normalise this year to an acceptable level he was expecting a full-year growth rate of 5.5% unless there is a major exceptional kicker that could pull the growth rate upwards. He expected GDP growth to average between 4% and 5% in the first half of this year.
“Private investment will be the key.''
Domestic demand, in the form of consumer spending and private investment, was the big contributor to the economy in the fourth quarter of last year.
Export growth slowed much faster than what Malaysia's regional competitors experienced, which some put down to the loss of competitiveness rather than the strong ringgit.
Lee said if investment growth, which was steady in the fourth quarter, could sustain its momentum, then that would be a good sign for the economy as public investments was expected to slow down in 2011 because of the lower budget.
Private investments grew by 9.2% in the fourth quarter and the Economic Transformation Programme (ETP), and the billions of ringgit expected to be invested, is expected to play a big role in driving investments in the future.
Economist wonder, however, if much of the money from the ETP earmarked for investments would truly be felt in 2011. Getting the RM36.5bil mass rapid transit construction off in the middle of the year would be a benefit for investments in 2011 but the impact of other previously announced large ETP projects might only be felt from 2012 onwards.
Another development economists are also watching for is the commitment from more Malaysian companies to invest a greater share of their profits in Malaysia as oppose to overseas and for non-government linked companies to match some of the big investment commitments shown by the GLCs.
Maybank Investment Bank Bhd group chief economist Suhaimi Ilias expected growth to stabilise at 5% in the first half but average 5.5% in 2011.
He echoed what many were saying the impetus consumer spending would have on the economy but felt there must be a strong push from private investments this year for growth rates to reach his targets.
“Consumers played a stabilising role to drive growth last year,'' said Suhaimi of the economy's performance last year.
He, however, said consumer spending based on the accumulation of debt levels was not sustainable and should be driven by real income growth, which he feared might be diminished from the rise in inflation rates.
Food and commodity prices, which has been fuelling inflation, would however be a bonus to rural households and its impact on domestic demand could be significant as 40% of consumers reside outside the urban cities.
“The last two years had been a case of crisis management strategy but going forward from this year is the challenge to sustain activity, restructure the economy and improve Malaysia's resilience,'' said Suhaimi.
MIDF chief economist Anthony Dass is projecting the real GDP would expand by 5.3% in 2011 and the slower growth could be attributed to less favourable base effects, unwinding of policy stimulus and more subdued growth in several major markets.
OSK DMG economist Enrico Tanuwidjaja, who had forecast growth of between 5% and 5.5% this year, sees an export recovery in the second half of the year but pointed out there could be risk factors that might derail that.
Tanuwidjaja said the recovery in the US consumer demand would help Malaysia's exports but if political turmoil in the Middle East were to spread and keep energy costs moving upwards, that would impact on external consumption and investments.