Economic

Executive Summary

The road to global recovery appears to be sluggish and uneven, facing many daunting challenges along the way. Both the World Bank and the IMF are projecting the world economy to slide into a deeper recession in 2009. In Jul'09, the IMF revised its global economic forecast to -1.4 per cent in 2009 ('08: 3.1%), while the global contraction in 2009 is estimated at -2.9 per cent by the World Bank. According to the latest IMF revision, the US ('09: -2.6%) will experience a less severe recession in 2009 compared to Europe which may face a deeper one ('09: -4.8%). The IMF projects the world economy to recover to around 2.5 per cent growth in 2010, with the US recording a meagre 0.8 per cent growth in 2010, slightly higher than the previous zero per cent growth forecast..

As the external sector tumbles, Malaysia's GDP contracted by a steep -6.2 per cent in 1Q09, following a stagnant 0.1 per cent growth in 4Q08. As external demand nose dived, Malaysia's exports dipped sharply in 1Q09, while investment was severely affected as well. Given the deteriorating global economic prospects, a second stimulus package amounting to RM60 billion (about 9% of GDP) was unveiled in Mar'09. Although the second package appears larger, the actual direct spending is only RM15 billion (or 25% of total) to be spent over a two-year period. The recurring concerns have been the speed and efficiency of implementation and the potential leakages. A notable point is the greater attention given to retrenched workers and unemployed graduates. With the second stimulus package, the fiscal deficit is estimated to rise to 7.6 per cent of GDP in 2009, up markedly from 4.8 per cent in 2008.

In a move to make Malaysia more attractive to investors, liberalisation measures have been announced. Starting 22 Apr'09, 27 services sub-sectors were fully liberalised to foreign investors, on the premise that Malaysia lacks expertise and local investments in many of these sub-sectors. Among the sectors opened up are computer and related services, health and social services, tourism services, transport, recreational, business services and shipping. On 30 Jun'09, the long standing 30 per cent bumiputra equity requirement for newly listed companies was removed, making investment conditions less restrictive. This will bring Malaysia's equity market closer to regional benchmarks, but the impact remains to be seen since there are many factors influencing investment decisions

Monthly indicators up to May'09 are still losing momentum markedly, but the rate of decline has eased slightly in some sectors. Industrial output registered a sharp contraction in May'09 (-11.1% year-on-year), but subsiding from a steeper fall (-17.9% ) in Jan'09. Exports have yet to show any stabilising signs, nose diving by -29.7 per cent in May'09, while imports dipped -27.8 per cent. Thanks to reduction in local oil prices and slower rise in food prices, inflation has eased to 2.4 per cent in May'09, down from 3.9 per cent in Jan'09. Inflation will likely subside further in tandem with the softening economy. .

In the wake of the deteriorating global economy and its adverse effects on domestic conditions, Bank Negara reduced the Overnight Policy Rate (OPR) by 50 basis points to 2.00 per cent on 24 Feb'09, the third time in five months. Bank Negara has slashed 1.50 percentage points from 3.50 per cent since Nov'08 and cut the statutory reserve requirement (SRR) to 1.0 per cent, effective Mar'09. Bank Negara has noted that lower rates could hurt savers and those who rely on incomes from deposits. The latest policy meeting on 26 May'09 has decided to leave the policy rate unchanged in view of the persistent effects of the crisis amid early signs of stabilisation in some indicators.

Consumer and business confidence has improved in 2Q09, possibly influenced by the measures taken to support the economy. These include the fiscal stimulus packages, the historically low interest rates, and the recent liberalisation measures. Both the Business Conditions Index (BCI) and the Consumer Sentiments Index (CSI) have passed the 100-points threshold that separates expansion and contraction. The BCI, which is based largely on firm-level information, has gained 44.1 points to stand at 105.2 points in 2Q09, up from 61.1 in 1Q09, indicating that business confidence has regained some strength. Likewise, the CSI has notched up 26.9 points to 105.8 points in 2Q09, up from 78.9 points in 1Q09. Despite the still sharp declines in monthly indicators, the rise in sentiments could have been propped up by the perception that recent measures would stabilise the economy.

TThere are glimmer signs that the global downturn has stabilised somewhat, but the recovery is expected to be sluggish and uneven. The healing from the current crisis will be difficult compared to previous ones because of the synchronised nature of the downturn. It will take time and huge resources to revive the deeply entangled US financial sector while policy options are running out. The weak external sector will impede a faster recovery, and the lower commodity prices are not helping either. Banks are becoming more cautious as bad loans could rise soon, limiting the flow of funds to firms. The services sector will be the pillar of strength amidst a glum manufacturing sector. It is certain that Malaysia's growth will slide into a technical recession in the first half of '09, as it takes the hit from the knock-on effects of a flagging global economy. Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.

In view of the deep declines in macro indicators, the fragile business and consumer confidence, and the still dismal sectoral indices, we have revised Malaysia's growth forecast for 2009 downwards to -4.2 per cent, from -2.2 per cent earlier. If exports and FDI shrink severely, the downturn could be more damaging. We have also downgraded the 2010 growth forecast to 2.8 per cent, from 3.3 per cent previously, in anticipation of a gradual or a ''u-shaped'' global recovery.

source:Malaysian Institute of Economic Research

There are several key elements affecting the overall economy, and the stability or otherwise of each can be integral to your business’s viability for the year ahead. JAMES THOMSON surveys the likely scenarios.

Australian entrepreneurs have started 2009 with one word ringing in their ears: Recession.

Last year we watched as financial markets across the globe went into freefall, but this year the real economy looks set to suffer, as households stop spending, workers get the sack, and businesses are pushed to the brink of collapse.

It’s going to be rough; but there are still some bright spots for canny companies. Export markets should hold up well, the housing sector looks set for modest growth, and interest rates will keep falling.

To help you steer through the mire, SmartCompany has compiled the 10 crucial economic forecasts for your business in 2009.

1. Economic growth

So will we actually fall into a recession as defined by two periods of negative GDP growth? Almost certainly. Most economists believe the economy contracted in the December quarter of 2008 (we’ll get the official confirmation of this in February) and is also likely to contract in the first three months of 2009.

AMP Capital Investors chief economist Shane Oliver is tipping a mild recession as households in Australia and around the world stop spending and reduce debt. But he leans towards an improvement in the second half of 2009 or early 2010.

“Global recession during the next six to nine months (will be) made worse as households in rich countries reduce debt levels. However some sort of recovery should start to become visible during the second half, or at least in 2010. Some of the conditions for global recovery are falling into place, such as falling oil prices, falling inflation, falling bond yields and fiscal and monetary stimulus.”

Most economists are expecting Australia’s GDP will grow between 0.2% and 1.5% in 2009, compared with growth of around 2.25% in 2008. The outlook for 2010 is somewhat better, with economists tipping GDP growth of between 1.7% and 2.5%.

2. Unemployment

The biggest question mark over these economic growth forecasts is the unemployment rate. If unemployment were to rise sharply from the current level of 4.4%, then households will be hit hard and the recession could be deeper than first expected. Stephen Walters, chief economist at JP Morgan, describes households as the Achilles heel of the Australian economy.

“After an extended spending splurge, households embarked on a period of austerity in early 2008. Confidence since has collapsed, owing to plunging equity prices and the onset of global recession, [and] the main headwind for households currently is rising unemployment.”

Walters expects the unemployment rate to double to 9% by the end of 2010, while Westpac chief economist Bill Evans is far more optimistic, forecasting the unemployment rate will rise to 5.3% by the end of 2009 and 6.1% by the end of 2010.

3. Business investment

The key to just how far the unemployment rate rises will be whether businesses are willing to continue to invest and employ. While most economists agree business is far better placed (mainly thanks to lower debt levels) than in previous recessions, difficulties in securing credit and falling commodity prices have severely dented confidence.

“If, as we expect is happening in the US, businesses change their operating model from profit maximisation to debt minimisation and cash hoarding, then Australia's growth prospects are precarious,” Evans says. “Businesses would persist in delaying investment and hiring, which would in turn intensify households' concerns about job prospects.”

Evans is predicting business investment growth of -6% in 2009 and zero in 2010, while Walters is predicting a fall from 11.4% in 2008 to -5.1% in 2009 and -7.8% in 2010. But it is worth noting that there are clear risks that the slump in business investment could be far greater – as Evans points out, business investment fell by 20% in 1990 and 1991 during the last recession.

4. Public sector spending

Governments around Australia have valiantly attempted to pick up the slack from the fall in household and government spending. “We anticipate a nearly 7% rise in public spending in real terms in 2008 as the central Government deploys the federal budget surplus,” Walters says.

As well as direct handouts and tax breaks for individuals, governments around the nation are set to launch aggressive infrastructure spending plans to stimulate activity and create jobs. But that won’t necessarily be easy, as Stephen Halmarick, managing director of economic and market analysis at Citi Australia, points out. “The challenge will be to have the projects up and running as soon as possible – this won’t be easy – (and) ensure the projects are ‘worthwhile’.” Another challenge for state governments will be getting funding for projects given the tight credit markets.

5. Interest rates

The big question with interest rates is; how low can they go? The Reserve Bank of Australia cut rates hard over the final few months of 2008, taking the official cash rate from 7.25% to 4.25% between September and December.

Most economists are tipping the official cash rate will be cut to 3.5% by March 2009 (which implies cuts are likely in February and March) although it is clear that the official rate could fall further. “Given that the flow of economic data for the global economy continues to deteriorate, and our forecast of recession in Australia, we expect the Australian cash rate to be lowered to 3% by March 2009,” Citi’s Halmarick writes.

6. Housing market

The housing market should get some sort of boost from sharply lower interest rates and the stimulus created by the beefing up of the first home buyers’ grant. On top of this, it’s worth noting that Australia’s housing market remains clearly undersupplied, with Westpac’s Evans estimating the shortage has reached around 140,000 dwellings – almost a full year's production.

“While Westpac's forecast of a solid recovery in dwelling investment in 2009 may prove to be over optimistic, there seems little chance that the style of collapse in residential investment that we have seen in previous recessions will occur in 2009 or 2010.”

JP Morgan’s Walters is tipping a 2% rise in dwelling investment in 2009.

7. The Australian dollar

The rapid fall in the dollar has put huge pressure on Australian business, with a recent survey from Dun & Bradstreet revealing 70% of firms have been negatively affected by the dollar’s slide. Unfortunately, the Aussie dollar looks set to fall further as the RBA cuts rates. ANZ chief economist Saul Eslake expects the dollar to be trading at around US55c by the end of 2009. That could force many Australian companies to put their prices up even further in 2009.

8. Trade

While the dollar will help exporters, the onset of a global recession and lower demand for Australian commodities (particularly resources) will result in exports falling but not collapsing –Walters is tipping a 4% fall in export volumes. On the flip side, imports are likely to fall as a result of sagging consumer spending. Import prices are likely to rise due to the falling Australian dollar.

9. Inflation/deflation

The war on inflation appears to be well and truly won, with most economists predicting inflation will fall rapidly, hitting the RBA’s target band of 2% to 3% by the middle of 2009. In fact, AMP’s Oliver believes deflation may be more of a problem, as he explained in this SmartCompany article. If the global recession is particularly deep and prolonged, Oliver may just be right.

10. China

Many of the forecasts outlined above will depend on what happens to the global economy, and particularly the economy of China, Australia’s largest trading partner and second largest export destination. If China’s economy is to slow dramatically, Australia’s economic downturn could be far worse than first thought.

Then again, if China can rebound, Australia will be a key beneficiary. Su-Lin Ong, senior economist and fixed income strategist at RBC Capital Markets, expects the authorities will have little choice but to stimulate the economy and prevent a rise in Chinese unemployment and social unrest.

“The challenges are considerable, but China ultimately remains on a long run upward trend as it urbanises, industrialises, and lifts its living standards,” she says. “Resource-rich Australia remains a key beneficiary.”

China’s rapid growth propelled Australia’s economy to great heights in the last decade. Let’s hope there is some fire in the dragon yet.

WASHINGTON – Using better-than-expected jobs numbers to press his top domestic priority, President Barack Obama is arguing that overhauling the health care system is essential to the country's economic well-being.

Republicans countered that the high unemployment rate — 9.4 percent in July — shows how families and businesses are struggling and that Obama's reliance on a large government role in expanding health coverage is the wrong approach.

A net total of 247,000 jobs were lost last month, the fewest in a year and a drastic improvement from the 443,000 that vanished in June as the U.S. tries to pull out from the worst recession since World War II.

"We've begun to put the brakes on this recession and ... the worst may be behind us," Obama said in his weekly radio and Internet address Saturday. He cited Friday's Labor Department report that showed a dip in unemployment, but said, "We must do more than rescue our economy from this immediate crisis. We must rebuild it stronger than before."

He added: "We must lay a new foundation for future growth and prosperity, and a key pillar of a new foundation is health insurance reform."

It's a pitch that comes as the Democratic-controlled Congress struggles to write a health care plan that meets Obama's goals of expanding coverage to millions of uninsured while reining in exploding costs.

"So far they have produced a measure that they cannot sell even to their own members," Senate GOP leader Mitch McConnell said in a jab at majority Democrats. "The only thing bipartisan, so far, is the opposition."

With lawmakers embarking on a monthlong summer break, opponents and supporters of various proposals under consideration are waging fierce campaigns. Obama is redoubling his effort to explain his positions to a public that polls say is becoming increasingly wary he can deliver on his promise to revamp health care.

The president argued that Congress was close to finalizing "real health insurance reform" but, as he has for weeks now, he warned against listening to opponents who he said were spewing misleading information and outlandish claims to defeat "the best chance of reform we have ever had."

Obama was getting a boost from Secretary of State Hillary Rodham Clinton, who as first lady led the failed effort in the 1990s to overhaul health care.

In an interview with CNN set to air Sunday, Clinton called Congress' latest work on the issue "a very healthy process," though she acknowledge serious differences in viewpoints that must be bridged.

Even so, she said: "I actually agree that at the end of the day, with all of this negotiation and back and forth, you know, we're going to come up with something" and "my hope is that it's going to be meaningful enough to make a difference ... on the cost side."

Countering the Democratic position, Bob McDonnell, the Republican nominee for Virginia governor, argued that the new Labor Department report was "yet another reminder that families and small businesses are struggling as unemployment remains high."

In the GOP's response address, McDonnell sought to draw distinctions between Republicans and Democrats on economic and health care policy.

"As Republicans, we believe you create jobs by keeping taxes and regulation low, and litigation at a minimum. Americans succeed when government puts in place positive policies that encourage more freedom, and more opportunity," he said.

McDonnell also said that, unlike Democrats, Republicans are committed to helping the uninsured — "not through nationalizing the system with a costly government-run plan, but rather by supporting free-market incentives and helping small-business owners make coverage more accessible and affordable, and ensuring that Americans can keep their individual private policies."

source:http://news.yahoo.com/s/ap/20090808/ap_on_go_pr_wh/us_obama_health_care

HONG KONG, Aug. 8 (Xinhua) -- Leading indicators suggest that the global recession is coming to an end and the world economy is on the road to a policy-induced recovery, a senior economist of the Moody's Economy.com said in a latest report.

"The OECD's composite leading indicators signal that the worst is over," Tu Packard said in the global outlook report released Friday by Moody's Economy.com, the research unit of Moody's Corporation, which is independent of Moody's Investors Service.

The OECD refers to the Organization for Economic Cooperation and Development.

Packard said he saw significant improvement in the world economic map in July, as compared with that in January.

Ample liquidity provided by central banks has helped stabilize the financial markets and credit conditions and bank liquidity has been improving, he said.

In Asia, China and India are again picking up growth momentum and are the first to recover from the impacts of the global financial turmoil and economic slowdown. Indonesia and Bangladesh are still members of the expanding growth club.

Turkey and South Korea, which enjoyed broad-based growth in the second quarter, are projected to have an early recovery. South Korea and other industrialized Asian economies are also benefiting from a strong recovery in the electronics industry.

But Japan remains in the slowdown phase, still troubled with high unemployment and massive overcapacity in manufacturing.

In the Middle East, Egypt and Syria are still growing.

In Latin America, the recession will be brief and mild thanks to the help of monetary expansion and increased government spending on infrastructure.

The Eurozone gross domestic product is forecast to contract by over 4 percent this year, but the seasonally adjusted pace of decline will slow in the second half.

Most notably, China has been trying to shift its growth drivers and deploying vast resources to strengthen domestic demand and further develop infrastructure, including green technologies. Household spending is holding up well, with retail sales growth averaging about 15 percent year on year.

The import composition also shows China's effort to shift to domestic demand-led growth. Moreover, it is also contributing to the recovery of other economies with its demand for raw materials resulting from increased spending on infrastructure.

"This ... also helped spur industrial production" in Taiwan as well as South Korea, Japan and Germany, Packard said in the report.

The Chinese locomotive will help shore up the world economy for a time. Nevertheless, a strong global recovery will only take place when the United States economy starts to grow again in earnest, which will depend on easing credit conditions.

Packard said the main downside risks have to do with the still fragile financial sector, especially non-performing loans extended by Europe to East Europe, and that the influenza A/H1N1 was also a source of further uncertainties.