Executive Summary by The Malaysian Institute of Economic Research

The global economic outlook remains fluid and increasingly worrying. Further deterioration in the economic and financial environment in the Eurozone will likely weaken U.S. further, with repercussions for international trade. Further monetary policy easing beside the "operation twist" will be necessary in 2012 to revive the U.S. economy. China and other emerging economies are heading for a soft landing in the near term. Weaker global outlook, which reduces demand for commodities, will bring about lower inflationary pressures ahead. In turn, this may provide leeway for policy easing in selected economies, such as China.

In Malaysia, the 2Q11 GDP growth edged lower to 4.0 percent year-on-year due to a weaker domestic demand. By sector, services (6.3 percent) and manufacturing (2.1 percent) were the main growth engines. Economic growth momentum will probably moderate from 2H11 onwards arising from a weaker exports outlook. Further implementation of ETP projects and Budget 2012 handouts will boost domestic demand, but unlikely to offset underperformance in net exports. Against this background, MIER downgrades 2011 GDP growth rate to 4.6 percent year-on-year. For 2012, MIER revises the GDP growth forecast to 5.0 percent.

As a result of protracted slowdown in global and regional economic outlook, MIER's Business Conditions Index (BCI) and CEO Confidence Index (CEO) eased to 104.5 points and 93.3 points, respectively in 3Q11. In contrast, the Consumer Sentiment Index (CSI) edged up marginally to 108.7 points, on receding inflationary expectations. Seasonal factors lifted Retail Trade Index (RTI) higher to 128.4 points. Easing supply disruptions pushed Automotive Industry Index (AII) higher to 150.0 points.

Recent foreign exchange liberalization measures will be neutral on the performance of ringgit since higher direct investment abroad will be offset by inflows from more trade finance and easier borrowing rules from nonresident related companies. Thus, RM/USD is projected to average around 3.00 in 2011. Improving macroeconomic fundamentals will see an average RM/USD of 2.95 in 2012.

Heightened global risk aversion resulted in sudden reversal in government bond market and sell-off in Asian currencies and equity markets. The ringgit fell 3.3 percent in NEER terms, while the FBMKLCI sagged 4.2 percent in Sep-11. With further unwinding of USD carry trades, the RM/USD is forecasted to average around 3.20 in 2011, before appreciating to 3.10 in 2012.