Patterns of employment and wage dynamics through the downturn and rebound have varied across sectors, in part reflecting exposures to the external demand shock. The labor market outlook is improving with vacancies on the rise and retrenchments sharply down from their crisis levels. Monetary, fiscal and financial sector policies played a supportive role during the crisis. As in other countries, a key policy question has been when, and how, to withdraw support without derailing the recovery. The strength of the recovery to date, and the improved outlook, has prompted recent moves towards monetary policy normalization. With the stimulus packages pushing up the federal government deficit to around 7 percent of GDP in 2009,ongoing fiscal consolidation is required.
Real GDP is expected to rebound strongly in 2010. Momentum behind domestic private consumption and investment is building as the recovery in external demand continues. As a result, growth of 5.7 percent is projected for 2010, following a contraction of 1.7 percent in 2009. The future strength of the external demand recovery is one of the main near-term risks. The other is the extent to which there is a transition to growth that is driven by the revival of domestic private investment and continued private consumption growth as fiscal and monetary policy support unwinds.
Implementation of productivity-enhancing structural reforms put forward in the recently released New Economic Model is crucial to the medium-term outlook. Growth forecasts at 5.3 percent in 2011 and 5.6 percent in 2012 price in the implementation of structural reform measures at a gradual pace. The forecasts also reflect a fiercely competitive environment for trade and FDI, as the global economy continues its rebalancing and countries around the region catch up along the value chain.
The main upside risk to the long-term outlook is if the reform program under the New Economic Model will be comprehensively and expeditiously implemented. Along with progress on fiscal consolidation it could also help reverse the recent sharp rise in Malaysia’s government debt due to the fiscal stimulus spending. On the flip side, the potential stalling of reform momentum could drive down growth prospects and lead to rising government debt relative to GDP.