Business confidence in Malaysia's manufacturing sector has improved in the September quarter despite shrinking exports and weak manufacturing output, a private think-tank said today.

The Malaysian Institute of Economic Research (MIER) said the economic recovery lost some momentum in the third quarter as exports contracted for the second straight month in August due to declines in shipments of electronics and electrical products.

Production also dipped in August to its slowest pace since February, it said.

But MIER said its recent survey showed higher overall sales growth in the third quarter, lifting its business condition index (BCI) up 4.90 points from the June quarter to 109.80.

The BCI rose 5.60 points from the first quarter to 104.90 in the quarter to June.

Cautious rise

MIER said the BCI has been inching up over three consecutive quarters, reflecting a "cautious rise" in business optimism in the manufacturing sector and dispelling fears the "economy could sink into near-recessionary levels."

It said the cautiousness was understandable due to the recent spate of weak economic news, the fragile global economic recovery and the fact the local economy cannot rely indefinitely on pump-priming in view of the government's huge deficit and rising external debt.

"On the bright side, the rise in the BCI also provides tentative signs that the slide in manufacturing output in recent months many be reaching a point of inflection, with the likelihood of a turnaround in the coming months," it said.

The anticipated recovery in the US economy and global semiconductor sales will eventually filter through to higher demand for Malaysia's electronics and electrical exports, it added.

Malaysia's gross domestic product expanded 4.4 percent in the second quarter, down from 4.6 percent in the March quarter but there are concerns it may not achieve its official growth target of 4.5 percent this year.

The government announced a RM7.3 billion economic stimulus package in May to soften the blow of the Severe Acute Respiratory Syndrome (Sars) crisis on business.

But trade figures remained weak, bucking regional trend in August with declines of 1.9 percent in exports and 8.7 percent in imports as other countries posted positive growth, economists said. - AFP