Merrill sees Malaysia inflation, GDP rising

Merrill sees Malaysia inflation, GDP rising

KUALA LUMPUR (Reuter): Malaysia's robust economy will start to strain at the seams next year as a tight labor market and buoyant domestic demand push up inflation and wages, Merrill Lynch said yesterday.

In its Asian economic commentary made available to Reuters, Merrill said Malaysia's Gross Domestic Product (GDP) is expected to grow by nine percent next year on the back of "sound economic fundamentals" over the next 10 to 12 months.

"There is a good chance that 1994 will see the official growth target of 8.4 percent being surpassed," Merrill said.

"Although growth is likely to ease in 1995, it may not be much below nine percent," the report said.

But Malaysia's robust growth had its accompanying problems in the shape of spiraling domestic demand from both the private and public sector, rising inflation and growing tightness in the labor market.

"Consumption growth could prove exceptionally strong in the coming year," Merrill Lynch said. "The tight labor market is believed to be fueling rapid wage increases.

"In 1993, based on collective wage agreements, wages in the manufacturing sector rose 15.1 percent compared with 9.9 percent in the previous year."

A massive slate of infrastructure spending for the 1994-1998 period is projected to cost between 55 billion ringgit (US$21.4 million) to 72 billion ringgit ($28.12 million).

The infrastructure spending will peak in the 1995-1996 period, Merrill said, aggravating domestic demand and boosting fixed investment growth.

"A second factor that is also likely to contribute to rapid fixed investment growth in the coming years will be the need for automation in factories," the Merrill Lynch report said.

Merrill said inflation, which has been foremost on the minds of the country's leaders and is expected to dominate budget discussions this year, will jump higher to 4.5 to five percent next year. It was 3.6 percent in calendar 1993 and is running at around four percent this year.

"(Inflationary pressures) are likely to stem mainly from the rapid wage increases that are inevitable now that the economy has effectively reached full employment."

Malaysia's unemployment rate stood at three percent in 1993 and could drop to about 2.6 percent this year, Merrill said.