No cause for worry from US slowdown

By Jagdev Singh Sidhu

A SLOWDOWN in the US economy will not significantly derail Malaysia's growth process since the overall economic fundamentals of the country justifies a sustainable recovery, according to HLG Research in a report.

"The large current account surplus and foreign reserves accumulated in 1998-99 are key defensive features that will protect growth,'' said the stock broking house economist Lee Heng Guie.

East Asia has been climbing out from a terrible financial crisis over the past two years in part led by strong exports and fiscal stimuli.

HLG Research said a strong US economy, which gobbles up 22% of the region's exports and accounts for 15.3% of world trade, was one of the key drivers of Asian exports.

Driving growth in the US, said HLG Research, has been the positive wealth effect from a bouyant stock market although at the expense of imbalances such as a burgeoning current account deficit, high private gearing, inflationary pressures, rising asset prices and negative saving ratio.

"These stress signs accentuate the risks in the economy. The recent sharp correction in the US stock markets triggered by higher-than-expected inflation re-highlight the lingering concern over further interest rates hike in the future,'' the report said.

"Further, a series of monetary tightening since the second half of 1999 has raised concern over the sustainability of the US economic growth.''

The implications of a US economic slowdown is that it could cause a hiccup on the Malaysian economy since the country is highly trade-oriented with export to gross domestic product (GDP) ratio of 107%.

The US has maintained its position as Malaysia's largest export market with a share of 21.9% of total exports last year, said HLG Research.

The trade surplus with the US rose to a record high of RM27.1bil in 1999, contributing 37.4% of total trade surplus of RM72.3bil.

"While exports to the US are significant, Malaysia also enjoys large intra-regional trade flows that accounts for about 38% of total exports. A broad-based export recovery is firmly in place,'' said HLG Research.

"We believe slower US demand can be compensated by sustained demand from the regional economies barring any adverse hiccups in the regional economies.''

HLG Research said sustained economic expansion in the Euro-11, Britain and Japan would provide added support to exports.

Although an economic slowdown in the US would have an effect on Malaysia, HLG Research said empirical correlation between the Malaysian and US economies through 1990-1999 was weak.

"Despite a 0.2% decline in the US GDP in 1991, Malaysia's GDP growth remained resilient (GDP grew at 9.5%),'' said HLG Research.

"During the year, manufacturing output growth, though moderated, remained strong at 14% while growth in other domestic sectors i.e. construction and services continued to be robust, underpinned by buoyant domestic demand.''

HLG Research said an analysis of contribution to real GDP growth showed that aggregate domestic demand remained the main driving force behind the strong economic performance in 1991.

The role of domestic demand is rearing its head again as the economy ploughs its way out of the economic crisis.

"Since the financial crisis, Malaysia's economic recovery strength has gradually shifted from one that was oriented towards net exports and fiscal stimulus to one that is driven by an expanding domestic private demand,'' said the report.

"The large current account surplus and foreign reserves accumulated in 1998-1999 are key defensive features that will protect growth.

"In conclusion, we do not expect a slow down in the US economy (assuming no hard landing and global crash in the stock markets) would significantly derail Malaysia's growth process,'' it added.