The economy has been recovering from the deep contraction in early 2011. Real GDP growth rose in seasonally adjusted terms in each of the last three quarters, limiting the full year decline in real GDP to 1.7 percent. Fixed investment, inventory restocking and, of late, exports, have been the main drivers of the recovery. At the sectorial level, manufacturing, which led the downturn, is making a strong contribution to growth. Although capacity utilization rates continue to rise, there remains considerable spare capacity. The official unemployment rate in average is 3.5 percent. The number of retrenchments has continued to fall, however, reaching pre-crisis levels. The continued pickup in manufacturing suggests that unemployment is trending lower, but it take longer for pre-crisis levels to return. Exports are recovering thanks to improved external demand and higher international commodity prices. Exports rose 37 percent year-on-year in January, with electrical and electronic products up 56 percent. Stronger demand from emerging East Asian economies has been particularly important, making the largest contribution to Malaysia’s export growth. Reflecting the integrated supply chains of much of the export-oriented manufacturing sector, imports used for processing – intermediate goods – have been rising in line with exports

Foreign investors have also returned. After the sharp rise in portfolio outflows in late 2008, in the heat of the global financial crisis, outflows shifted to sizeable inflows in the third and fourth quarters of 2011. Direct investment abroad also broadly returned to its previous trend. Overall, the current account surplus remained an oversized at 16.7 percent of GDP in 2011. The financial sector remains strong. Non-performing loans amount to 1.9 percent of the total, but there may be lags in the realization of any losses from the downturn. Capital adequacy ratio remains little changed at about 14.6 percent. Moreover, bank profitability appeared to start improving in the third quarter of 2011 after a long decline since early 2008. Bank lending is still largely concentrated on households, which remain in good financial health with moderate indebtedness. Lending activity is picking up, with credits to companies rising 20 percent year-on-year in the fourth quarter. .

Preliminary data indicates that the federal government deficit rose to about 7 percent of GDP in 2011 from 4.8 percent in 2010. The increase was due to lower revenues in line with the weaker activity and the stimulus spending. The Malaysian economy is expected to grow robustly by 6 percent in 2012, building on faster-than-expected growth in the fourth quarter of last year. The recovery will be driven largely by strong consumer spending and continued restocking. The contributions of net external demand will likely turn negative, as imports outpace exports given the stronger domestic demand. Unwinding of policy support through fiscal consolidation effort and further rate hikes are not expected to derail the recovery, as withdrawal of stimulus will be gradual. The growth outlook remains favorable for 2012 and 2013 with anticipated growth rates of 5.3 to 5.6 percent. The main near-term risk to the outlook is external and arises from the strength of the global recovery. The fundamental medium-term risk arises from the structural reform momentum under the New Economic Model (NEM). The NEM is expected to revitalize growth by promoting private sector investment, liberalizing and deregulating the economy and modernizing the country’s social protection mechanisms. Provided reform momentum picks up as under the NEM, Malaysia’s competitiveness should be enhanced as will growth prospects. .

Source: world bank, country profile.