A top economic think-tank said today it expected the economy to expand by 6.5 percent this year, below the government's forecast of 7 percent, as it sees slower exports and weaker business sentiment.

The Malaysian Institute of Economic Research (MIER) said the weaker tone was expected to prevail until 2011, where it

forecasts economic growth of 5.2 percent.

"There are downside risks to growth and we have based this on slowing exports and weaker sentiment in our business conditions survey," its executive director, Zakariah Abdul Rashid told a media briefing on the Malaysian Economic Outlook in Kuala Lumpur today.

Zakariah said MIER expects inflation at 2 percent in 2010 and 2.5 percent in 2011. The authorities would likely raise interest rates to 3.25 percent by end 2011 from 2.75 percent to control inflation.

This was based on slower growth in imports and exports as well as the decline in business condition index (BCI) in the third quarter of this year which more than offset the surge in consumer sentiment index (CSI).

"Although the consumer sentiment increased, it is on a cautious mode and this will be reflected in the fourth quarter.

"We expect exports in September to slow down with moderate growth in imports," he added.

Zakariah said the forecast was also supported by the recent in-house surveys.

Businesses not upbeat

He said the BCI, which tracked domestic manufacturing activities, declined further in the third quarter after losing 14.7 points quarter-on-quarter to 104.9 points.

It reached its high of 124 points in the first quarter, he said.

"The decline implies the sector is still expanding although at a

considerably slower pace.

"This shows the businessmen are not upbeat about the business condition in the third quarter," he said.

Zakariah said the CSI for the third quarter surged to 115.8 per cent and with improving labour markets on the cards, consumer spending was expected to rise.

He said the third quarter GDP growth this year would be lower than 8.9 percent in the second quarter.

Zakariah said the ringgit uptrend would also affect the export market.

However, he said, the appreciation in the local commodity prices would contribute to export gains.

'GST deferment appropriate'

"The forecasts of world commodity experts on crude oil and crude palm oil will be favouring us at least in first quarter next year," he said.

He said the deferment of goods and services tax was apppropriate and "most likely can be in place in one-and-half years to two years, perhaps after the next election".

On the 2011 budget that the government announced on Friday, Zakariah said MIER was disappointed that the reduction in the fiscal

deficit was small and that there were no measures to address the increasingly high household debt.

Prime Minister Najib Abdul Razak said that Malaysia was on track to hit its 5.6 percent fiscal deficit target in 2010 and would reduce that further to 5.4 percent in 2011.

Zakariah said although the Budget 2011 was within expectations, there were also disappointments.

"There were no reduction in fiscal deficit. Measures to address property speculation, removal of withholding tax on real estate investment trusts for foreign investors and higher personal relief or lower tax were also not looked into," he said.

- Agencies