(AFP) Prime Minister Dr Mahathir Mohamad has predicted that the economy could still grow by two or three percent this year despite global uncertainties.

Reacting to second quarter GDP figures released yesterday which showed growth of 0.5 percent year-on-year and 1.0 percent quarter-on-quarter, Mahathir noted that the country had managed to avoid a recession.

"It's still positive. We have not gone into a technical recession even. If it had been zero or minus, it would be a different matter," Mahathir was quoted as saying by the New Straits Times today.

He said the economy would obviously not achieve the desired 7.0 percent growth and might not even reach the official five to six percent target set for the year.

"I think it will be lower than five (percent), but it will still be positive. We have to work very hard," he added.

Mahathir said the US economic downturn was far more serious and prolonged than had been predicted.

The better-than-expected second quarter GDP data and Mahathir's comments sparked a rally on the stock market, which rose 1.9 percent today.

"The market is up on index-linked counters... Mahathir's statement that there could still be positive growth (this year) boosted prices and also the GDP data," said a senior dealer.

Declining consumption

Bank Negara yesterday said growth in the June quarter was hit by a shaper-than-expected 6.7 percent slump in manufacturing. It predicted the third quarter to be subdued and a recovery only in the fourth quarter.

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.

The government in March cut its GDP growth forecast for this year to between five and six percent, from seven percent previously.

Economists said the country was not out of the woods yet as private consumption was declining and total investments had moderated amid an export slowdown.

Most analysts expected the economy to worsen in the third quarter before it rebounds in the fourth.

"I think this second quarter number continues to show that the undertone of the economy is still weak," said Lee Heng Guie, chief economist with HLG Research.

"I'm expecting a bigger contraction in the third quarter for the manufacturing sector and the services sector may also be affected. Things will start to improve and stabilise in the fourth quarter."

No escape

Eddie Lee, regional economist with Vickers Ballas in Singapore, said the decline in manufacturing was expected as no Asian country could escape the global electronics downturn.

Lee predicted the economy may worsen in the third quarter and said the government may have to look into more fiscal measures and tax incentives to prop up growth.

The government in March unveiled a RM3 billion supplementary budget to shore up the economy.