The Malaysian economy grew by about 5 per cent in 2011, which is less than the growth rate of 7.2 per cent registered in 2010, when the Malaysian economy rebounded from the adverse effects of the 2008 global financial crisis as a result of which the economy had contracted by 1.7 per cent in 2009. The recovery and sustained growth in 2010 and 2011 were driven largely by domestic demand and rising commodity prices as external demand for Malaysia's manufactured goods weakened.1
The liberalized services sector, the manufacturing sector, the agricultural sector, and the construction sector made positive contributions to GDP growth in 2010 and 2011. However, the mining sector's contribution was negative in 2010 and close to negligible in 2011.
Although economic growth moderated in 2011, inflationary pressures built up because of supply shortages, rising incomes, and subsidy cuts for essential food items and fuel. The government tried to contain inflation by raising the interest rate and the statutory reserve requirements of banks, reinstating some of the subsidies for essential food items; and providing cash handouts in its Annual Budget for 2012.2 The government also attempted to stabilize housing prices by introducing cooling measures.
The trade balance was positive in 2010 and 2011 and this generated a positive current account balance. The inflows of capital also helped to generate an overall surplus in the balance of payments, which was reflected in the increased international reserves held by the Central Bank of Malaysia in 2011.
The banking system was sound with steady loan growth and a relatively high risk weighted capital ratio (RWCR) and core capital ratio. The bond market was active with Malaysia becoming the largest issuer of Islamic bonds. The stock [End Page 185] market was vibrant but volatile because of the sudden inflow and outflow of foreign portfolio investments.
The government's fiscal deficit increased from 5 per cent to 6 per cent of GDP and the public debt as a percentage of GDP was 56 per cent in 2011. The government's target is to reduce the fiscal deficit to 3 per cent and the public debt to GDP ratio to 40 per cent by 2020. Labour market conditions were stable as retrenchments were more than compensated by new appointments. There was full employment and rising wages in some sectors of the economy.
The recent economic history of Malaysia clearly reveals that the growth of the Malaysian economy is overdependent on consumer demand in America. When consumer demand fell in America in 2008 due to the sub-prime crisis that erupted into the global financial crisis the demand for Malaysia's major exports, that is, electrical and electronics goods, also declined. The decline in external demand resulted in the contraction of the Malaysian economy by 1.7 per cent in 2009, from which it recovered in 2010 when economic growth rebounded sharply to 7.2 per cent. This impressive growth was largely due to anti-cyclical policies implemented by the Malaysian Government in 2008 and 2009 to stimulate domestic demand as the main engine of growth. The growth in 2010 was also partly due to an increase in prices of primary commodities, especially oil and palm oil. The demand for the latter increased as a result of increased demand from the fast growing economies of China and India.
The growth rate achieved in 2010 could not be replicated in 2011 despite the increase in the demand for palm oil and oil because of the base effect and the continuing weakness in consumer demand in America because of job losses, homelessness, and declining average incomes.
In response to the declining external demand, the government introduced counter-cyclical measures over a two-year period which were targeted at stimulating domestic demand. The first stimulus package of RM9 billion was introduced in October 2008 and the second of RM60 billion in March 2009. The stimulus packages had a significant effect on domestic demand as its contribution to GDP growth was positive whereas the contribution of external demand to GDP growth was negative in 2010 and 2011. Private consumption and private and public investment contributed positively to GDP growth...