The economy is showing signs of a slow recovery, a leading think tank said today as it raised its 2009 forecast to a 3.3 percent contraction from 4.2 percent tipped earlier.

malaysia stock exchange market klse 141008 05 However, the Malaysian Institute of Economic Research (MIER) said Southeast Asia's third-largest economy may need a third stimulus package worth RM8 billion next year to spur the recovery process.

The MIER also upgraded its 2010 growth forecast to a 3.7 percent expansion from 2.8 percent forecast in July, in anticipation of a modest economic recovery worldwide.

"There are glimmer signs that the global downturn has stabilised somewhat, but the recovery is expected to be sluggish and uneven," the influential institute said in a report.

"Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace," it added.

Another hefty stimulus package needed

MIER chief Mohamed Ariff Abdul Kareem said that among the positive indicators, the contraction in Malaysia's critical exports sector has moderated, the services sector is growing and business confidence is improving.

"The growth is however going to be very tepid, it will be a very shallow and fragile recovery," he told reporters.

Malaysia has said it expects the export-dependent economy to contract by 4.0-5.0 percent this year due to a steep decline in exports and manufacturing.

The central bank announced in August that the economy shrank 3.9 percent in the three months to June year-on-year, in an improved performance from a 6.2 percent contraction seen in the first quarter.

Mohamed Ariff said Malaysia may need another hefty stimulus package of genuine government spending next year "to fuel the recovery process".

"The recovery process still needs a lot of assistance," he told a news conference.

The budget deficit is expected to reach 8-9 percent of GDP in 2010 due to lower tax receipts and the possibility that more stimulus spending.

Ariff said if a third stimulus package was implemented, it would add about 2 percentage points to the budget deficit.

No immediate inflation threat

Malaysia, which heavily relies on exports and oil revenues, has forecasted a budget deficit of 7.6 percent for 2009 and the 2010 shortfall is expected to come down marginally.

The government has announced two stimulus packages, the most recent in March billed as containing some RM60 billion in measures to pump-prime the economy. However the MIER said the package contained a lot of "padding".

Prime Minister Najib Razak said in August that the economy had "turned around a corner" and was on track for a recovery despite a second consecutive quarter of negative growth.

The MIER also saw no immediate inflation threat, but warned cautioned that it could be "imported" in the future from other countries which have been printing money as a means to pull out of the financial crisis.

"There is also the fear that if the asset bubble in China bursts, the knock-on effects would be felt here," said Ariff.

- Agencies