Malaysia announced that it expects its economy to grow at only 5-6% this year, down from 7%. Economists attribute the slowdown to a decline in exports. As an emerging economy, Malaysia is heavily depend on exports (especially technology related exports) to fuel economic growth. However, a global decline in IT and technology spending has hit Malaysian exporters especially hard. Even with the artificially favorable exchange rate, maintained at value which experts estimate to be 20% below fair value, exports are declining.

Malaysia will be forced to rely on the other factors of GDP if its economy is to grow. The first factor is government spending, which on outlays such as education, agriculture, and health care, looks to remain constant this year. Consumption, on the other hand should drive Malaysia’s economy. Consumption and growth effect each other in a circular manner. As the economy grows, consumers are left with more disposable income which they typically use to purchase more goods and services. This increases aggregate demand which increases GDP growth, which then increases consumption, until the process diffuses. Finally, investment in Malaysia continues to strengthen. as speculators pour money into Malaysian capital markets. Such speculators anticipate a revaluation in the exchange rate, which Malaysia insists will not happen. Reuters reports:

Bank Negara indicated speculation and short-term capital flows would not spark a change in currency policy. "The basis for any change would therefore be made on long-term structural considerations and not short-term movements in capital flows or transient shifts in exchange rate expectations," it said, adding that it could continue to absorb foreign inflows through money market operations.

Read More: Malaysia GDP growth seen slowing to 5-6 pct in ’05