The economy is out of the woods after the Iraq war and the Sars epidemic, with growth expected to pick up in the second half of the year, officials and economists said today.

The National Economic Action Council executive director Mustapha Mohamed said the government believes that the "worst is over" for Malaysia.

"The expected impact of Sars in May and June did not materialize. There is clear evidence that things are on the way up," he said, citing stronger production and trade data as positive indicators.

Malaysia should be able to reach its official growth forecast of 4.5 percent this year, he told reporters after launching a report by the Malaysian Institute of Economic Research (MIER).

Upwards revision

The MIER said it has revised upwards its growth forecast to 4.3 percent on expectations of an upturn in economic activity but maintained its 2004 estimate at 5.4 percent.

The private think-tank earlier this year cut its growth forecast to 3.7 percent from 4.7 percent due to the Iraq war and the Severe Acute Respiratory Syndrome (Sars) outbreak in the region.

MIER said the Iraq war had ended quickly and the Sars impact was less severe than feared, with only the tourism sector falling victim to the disease while the rest of the economy was largely unaffected.

The government's RM7.3 billion stimulus package unveiled in May also provided "some oomph" to the economy, it said.

MIER said its surveys on business conditions and consumer sentiment in the quarter to June indicated a rebound in confidence.

Overall manufacturing sales were satisfactory in the June quarter, with production gathering pace and local orders on the rise although export orders were still weak, it said.

Tourism sector boost

MIER foresaw a recovery in the tourism industry, Malaysia's second top foreign exchange earner, in the second half of the year but said prospects were mixed for the automotive sector after weak sales in the June quarter.

"Generally, indicators are improving and so is sentiment while the external sector has shown signs of recovery. Visibility is getting better," the MIER report said.

"We expect this will turn into a virtuous circle that will rekindle economic activity during the second half of this year and into 2004.

"In view of these positive developments, amid lesser negative issues, we have revised our GDP growth forecast for 2003 upwards to 4.3 percent. Assuming a more upbeat global economy and calmer geopolitics around the world, Malaysia's GDP growth in 2004 could possibly reach 5.4 percent."

At the same time, MIER warned that external risks remained, citing a possible terrorist backlash, new flash points in the Middle East, a sharp depreciation in the US dollar and an economic slowdown in the US, Japan and Europe.

Manufacturing up

Confirming the uptrend in the economy, the Statistics Department separately said manufacturing sales rose 5.2 percent in May from a year earlier to 26.4 billion ringgit and were up 0.8 percent from April.

This compared to April's manufacturing sales which rose 4.9 percent year-on-year to 25.8 billion ringgit but declined 11 percent from March.

"This could point to an inventory rebuilding. This would indicate an improved optimism among Malaysian manufacturers," said Azrul Anwar, economist with MIDF Sisma Securities. - AFP