Citi cuts growth forecast for Malaysia -- Vietnam's largest Online News Database by Intellasia

US Investment bank Citi has slashed its growth forecast for Malaysia's economy in 2009 to 0.5% from 3.1%, saying a recession is on the cards in the first quarter.

It expects gross domestic product (GDP) to grow by 2% in the fourth quarter of 2008, followed by a contraction in the first quarter.

(Kuala Lumpur %u2013 AFP file)

It also expects the economy to hit its bottom in the first quarter and rebound in the subsequent months.

"Once past the trough, the recovery will likely be tepid in the subsequent two quarters," said economist Kit Wei Zheng in a report.

Data from Asia in the New Year continues to surprise, with key Asian tech exporters recording double-digit export contractions.

"As the cushion provided by high commodity prices has evaporated, Malaysia's growth prospects could well converge with other regional tech exporters from here."

The severity of the downturn, he said, will depend on the resilience of domestic demand.

"Recent signs are not encouraging. First, the manufacturing slump has led to a spike in job losses, with more to come. Second, credit availability is tightening with loan approvals falling for the third consecutive month.

"The slowdown in domestic demand is reflected in the spread of weakness beyond manufacturing, into services and construction activity."

Monthly indicators suggest that the slowdown is beginning to spread beyond manufacturing, into services. Trade-related services, including rail cargo and most tellingly, air cargo and passenger traffic, are all in the red.

Air cargo, in particular, reflects the fall in electronics production and exports, since air freight is the most common mode of transport for electronics.

Kit said a more aggressive policy response is needed to cushion the downturn although this is limited by the size of the deficit, which could exceed 5% of GDP even without additional fiscal stimulus in March.

"Given recent further falls in oil prices and if another fiscal stimulus package similar in size to in November is announced, the 2009 fiscal deficit could possibly exceed 6% of GDP -a level which could trigger a sovereign credit ratings downgrade."

Citi expects at least a further 75 basis-point cut in the OPR in the first half of the year but also sees the possibility that the OPR could fall 100-125 basis points instead.