(AFP) The country can still avoid recession this year despite a worse-than-expected contraction in the September quarter, economists said today.

The central bank Friday announced that the economy contracted 1.3 percent in the third quarter, the first year-on-year contraction since the first quarter of 1999, amid sharp falls in manufacturing output.

Gross domestic product (GDP) however, was up 0.8 percent from the previous quarter and remained positive at 0.7 percent for the first nine months of the year, it said.

Maybank Securities said in a report the slump in the September quarter was magnified by a strong base in the same period last year.

"We are buoyed by the fact that the economy did not continue on a path of deterioration. Third quarter 2001 was 0.8 percent higher compared with the second quarter," it said.

"We are optimistic that the fourth quarter will be boosted by seasonal factors which will push GDP to be 1.9 percent higher than the third quarter."

Maybank Securities forecast a marginal contraction of 0.2 percent year-on-year in the three months to December.

"For the full year, we are adjusting our estimate from 0.8 percent growth to 0.5 percent. A relatively sluggish year for Malaysia but the recession is averted nevertheless."

Contraction expected

Manokaran Mottain, economist at SBB Securities, said most investors had expected a contraction after the release of falling manufacturing output for September.

"The only difference is the quantum. The consolation is that our economy is better off than Singapore and the whole year will be positive," he told AFX -Asia, an AFP -owned financial news wire.

He forecast zero growth for the fourth quarter, which would give 0.5 percent growth for the full year.

"Traditionally, the fourth quarter enjoys better growth due to the festive season. This year, we have the Aidil Fitri and Chrismas/New Year as well as bonus for civil servants and additional fiscal spending, so consumer spending should be better than the third quarter," he said.

"We belive the bottom has been seen."

Malaysians enjoys two public days to mark the Aidil Fitri festival marking the end of the Muslim fasting month of Ramadan in mid-December.

Decrease due to holidays

However, Suhaimi Ilias of Affin-UOB Securities saw a second quarter of year-on-year negative growth in the three months to December due to fewer working days in December.

"The second half of December can almost be written off. Our GDP growth hinges a lot on production growth.

"Even if there is a surge in government spending and consumer spending, I see a 1.8 percent contraction year-on-year for the fourth quarter but flat GDP for 2001," he added.

The central bank has said it expected GDP growth to improve in the fourth quarter and that the economy would remain in "positive" territory for the full year.

Malaysia last plunged into recession in 1998 amid the Asian financial crisis, but it rebounded the following year and recorded a heady 8.5 percent growth last year.

The government last month cut its growth forecast for this year for a second time to between one to two percent, and has imposed a range of fiscal measures to boost consumer spending.