(AFP) The nation escaped recession in the three months to June with gross domestic product (GDP) growing 1.0 percent from the first quarter, Bank Negara said today.

The economy grew 0.5 percent year-on-year in the quarter to June, hit by a sharper-than-expected 6.7 percent slump in manufacturing.

Governor Zeti Akhtar Aziz said the government would slash its full-year GDP growth forecast for a second time when it submits the 2002 budget to parliament in October.

"Based on the performance of the first half this year and the global outlook... it is very likely that the third quarter will be similar to the second quarter," she said.

"It will be in the fourth quarter before we see a recovery. Based on this, there will be a revision of (the GDP forecast) for the year."

The country's GDP contracted 3.9 percent quarter-on-quarter in the first three months of the year. A June downturn would have qualified as a technical recession -- two consecutive quarters of contraction.

On track

The government in March slashed its GDP growth forecast for 2001 to between five and six percent, from seven percent previously. Last year the economy grew by 8.5 percent.

"While slower growth is a matter of some concern, it is important to recognise that our underlying economic fundamentals remain on track for sustainable long-term growth," Zeti said.

She said the manufacturing industry was adversely affected by the global electronics downturn which was more pronounced than expected, but this was offset by growth in other industries.

Manufacturing contracted 6.7 percent in the June quarter, with production in the electronics sub-sector plunging 25.2 percent.

But services grew 6.1 percent and construction 3.2 percent as the government's expansionary policies begun to filter through, the central bank governor said.

Agriculture was up 1.3 percent due to higher crude palm oil production and mining grew 0.7 percent amid higher natural gas output.