KUALA LUMPUR (Aug 6): Malaysia, as well as other countries in the region, should take more fiscal and monetary policy measures to support the domestic economy given that external headwinds are intensifying, said the ASEAN+3 Macroeconomic Research Office (AMRO).

AMRO chief economist Dr Khor Hoe Ee (pictured) said that for now, the trade war between the world's two largest economies, the US and China, remains the biggest risk facing the ASEAN+3 region, which includes Japan, China, and South Korea.

He also noted tail risks such as a sharp slowdown in the Chinese economy, which could have a ripple effect in the region, as well as volatile financial market. However, Khor highlighted that with the Federal Reserve's decision to lower interest rates recently, this will provide a breathing space for major central banks, including those in emerging markets, to also lower rates to provide support to their economy.

"Malaysia has had negative export growth over the past several months. So that is one support for the economy that has collapsed. What that means is that growth is going to be weaker because aggregate demand is going to be weaker," Khor told reporters at a media briefing at the AMRO seminar on Building Capacity and Connectivity for the New Economy.

He also noted that despite indicators showing growth in the US economy, the second half shows a further slowdown which will cause a spillover to the rest of the world.

Given these external headwinds, including geo-political risks in the Middle East, Asian countries therefore should be more supportive by adopting more expansionary, fiscal and monetary policy, he said.

"We did a survey on where each country is in the business cycle. Turns out most are in the middle of the cycle, which means that growth is potential, so they do not need to do a lot to keep the economy going. But they do need to provide more support," he said.

AMRO projects for Malaysia to record a 4.5% economic growth this year, the same as its target last year.

"Malaysia had a new government last year, which was a big shock, and growth sort of eased off, but despite the easing, mostly due to investments and export, it was resilient. If it can uphold itself at this level, then that's good because external headwinds have gotten worse. If need be, we might shave off 0.1% depending on how the economy responds to trade tariffs," said Khor.

For the region, Khor noted that it has also held up well, however the organisation has revised its target a couple of times to reflect risks in the trade war.

"We had previously expected regional growth to be 5.1%, but then lowered it to 4.9% due to trade escalation. But with more tensions, we see the growth declining to 4.7% for this and next year," he said.

Looking ahead, Khor said Malaysia has attracted a more geographically diverse investor base in the "new economy" sectors although there is scope for further growth.

"Malaysia can leverage its existing pool of skilled labour, as it continues to strengthen overall regulatory framework and intellectual property protection to attract more investments," he added.