KUALA LUMPUR: The Malaysian Institute of Economic Research (Mier) warns that continuous use of private consumption as a tool to support the economy is “quite risky”.

“We have been using this tool for quite some time, urging households to consume more and more to the extent that households are given easy credit. Now, we are suffering from household debts,” said Mier executive director Zakariah Abdul Rashid yesterday.  Ironically, Zakariah made the observation right after presenting Mier’s gross domestic product (GDP) growth forecast of 5% for the country at Mier’s 20th Corporate Economic Briefing yesterday. He conceded the figure was “a bit optimistic” and that it would have to be supported by domestic demand.

Mier’s forecast is slightly higher than the 4.8% estimated by the International Monetary Fund and 4.7% predicted by World Bank. Mier also expects inflation will increase to 3.5% this year compared with 3.2% in 2014.

“The domestic source of growth comes from domestic consumption and private investment. When external factors [depreciation of ringgit and low crude oil price] are not giving much hope, we have to rely on the domestic economy even if the domestic source is not a real substitute for the external environment,” he said.

Indeed, Bank Negara Malaysia’s report released in March this year revealed that the country’s ratio of household debt to GDP rose to 87.9% in 2014 from 86.7% in 2013. Consumers themselves appear unenthusiastic about their role in sustaining the economy as Mier’s consumer sentiment index (CSI) has plunged for the third straight quarter to its lowest reading in six years. At 72.6 points in the first quarter of 2015, it represents a staggering decline of 24.2 points year-on-year and 10.4 points quarter-on-quarter due to a fall in consumer financial and employment expectations for the next six months.

“Flagging financial expectations mean that households will have less cash and purchasing power, which could choke the momentum of consumer spending. So don’t count on them to spend in the coming months as they are likely to cut or hold back spending on major consumer durables,” said Mier in its quarterly report.

Zakariah said the CSI also explains why the economy will see a moderating growth rate this year compared with the 6% achieved in 2014. The government will continue to push for higher domestic private investment to compensate for softening domestic consumption but  he acknowledged that this, too, would be challenging.

He said Mier’s 5% GDP growth forecast may appear optimistic but believes it is achievable, thanks to the strengthening recovery of the global economy. “We are moderately optimistic ... because there are emerging positive signs from the global economic  environment. If you look carefully, there will be strong growth this year in Japan and also in Europe. There will be a slowdown in China but growth there is still respectable.”

This optimism is reflected in Mier’s business conditions index (BCI) which rose to 101 points, up 14.5 points over the previous quarter but down 2.1 points over the same quarter in 2014 as businesses expect production and export sales to increase in the coming quarters.

“The improvement in the BCI in the next quarter will be driven by increases in production and higher external demand for manufactured goods. The boost in global demand due to the weaker ringgit could support optimism,” said Mier. “Falling oil prices will continue to lower production costs. These influences, ... could explain the optimism of manufacturing industries,” it said.

This article first appeared in The Edge Financial Daily, on April 23, 2015.