A leading think tank today cut its economic growth forecast for 2005 to 5.1 percent from 5.4 percent, citing high oil prices and softening external demand.

The private Malaysian Institute of Economic Research (MIER) warned further revisions could be in the offing for full-year Gross Domestic Product growth, which the central bank is tipping at 5.0-6.0 percent.

"Given these factors that could impact negatively on Malaysia's economic activity, we are compelled to revise our growth forecast downwards again," it said in a statement.

"We are revising our GDP growth downwards to 5.1 percent in 2005, lower than our previous forecast of 5.4 percent (made in April). If oil prices continue to rise, further downgrading may become necessary," MIER said.

The institute noted that high oil prices and a general rise in inflation and interest rates had dampened global economic growth.

"Growth rate projections for developed countries have been lowered. This will soften external demand for Malaysian products and hurt GDP growth," it said, adding that domestic demand could only take up part of the slack.

"The private sector is expected to be the main engine of growth with private consumption staying resilient but with the impending slowdown, public spending is still needed to support overall growth," it said.

Skyrocketing oil prices

Subsidies for petroleum cost Malaysia, a net oil exporter, RM4.8 billion last year. As a result, the government has raised petrol and disel prices three times since last October.

"The government may reduce oil subsidies further following the fiscal drive to reduce the budget deficit," MIER said.

Prime Minister Abdullah Ahmad Badawi said last month that the government may have to review the official forecast in view of skyrocketing oil prices.

Malaysia's economy expanded 5.7 percent in the first quarter of 2005 against 5.8 percent in the fourth quarter of 2004, with all major sectors on the uptick except construction.