The Malaysian economy is expected to move on to a more stable growth path in 2011-15, when we expect real GDP growth to average 5.3% a year. This follows a period of instability, during which the economy contracted by 1.7% in 2009 amid the 2008-09 global economic slowdown before rebounding to growth of 7.2% in 2010. The strong recovery last year was driven partly by the inventory cycle, as the dramatic drawdown of stocks that occurred in 2009 amid the slowdown was followed by rapid restocking in 2010. In the forecast period private consumption and investment will remain the primary drivers of economic growth. An increase in compulsory savings on the part of workers from January 2011 will eat into private disposable incomes, but growth in private consumption will continue to be underpinned by a fairly strong labour market. The positive effect of restocking on real GDP growth is expected to wane in 2011 as the process of inventory accumulation moderates. Despite the government's efforts to consolidate its finances, public spending (which will be guided by the 10MP) will rise by an average 4.2% a year during the next five years. Exports of goods and services are expected to grow by an average of 8.5% a year. However, the contribution of net exports to GDP growth will be marginal, as imports of goods and services will record similar growth rates.

In supply-side terms, the services sector will be the largest and most dynamic part of the economy, as the government channels more resources into the sector in a bid to ensure that Malaysia becomes a high-income nation by 2020. The industrial sector will continue to constitute a sizeable part of the economy, but we expect it to remain smaller than the services sector during the forecast period. Growth in the industrial sector will generally track the rate of expansion in the economy as a whole. The most dynamic services subsectors will be financial services, wholesale trade, and hotels and restaurants. Growth in financial services will be encouraged by gradual liberalisation. This will help to improve the international competitiveness of Malaysia's financial system, especially in Islamic-banking products, and will make the domestic financial sector more responsive to the needs of both the private and public sectors. The contribution of agriculture (and particularly palm oil production) to the economy will be important: agricultural output growth will assist in raising rural incomes and consumption during the forecast period.

However, given the uncertain outlook for the global economy, there are risks to the fairly benign forecast for growth in Malaysia in the next five years. Massive macroeconomic stimulus has stabilised the world economy and allowed growth to resume, but global growth will slow in 2011 as the impact of stimulus fades, and there is a risk of a deeper downturn in several major economies.

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