(AFP) - Business confidence has dropped for a fourth straight quarter and the economy could be heading for recession, the Malaysian Institute of Economic Research (MIER) said today.

The business conditions index (BCI) fell 1.4 points to 42.6 points in the third quarter, its lowest level since the third quarter of 1998, the independent think-tank said in its latest quarterly report.

A recession was possible this year despite the government having forecast economic growth of one to two percent, MIER said, adding that it believed the worst was yet to come as a number of responses were completed prior to the Sept 11 terror attacks on the US.

"The current reading reflects, to a large extent, the impact of the slowdown in the US and the global electronics slump on business conditions in the country and may not have fully incorporated the effects of terrorist attacks on the US.

"Indeed, the only sure thing is that the economy will be facing more uncertain circumstances in the coming months which will serve to exacerbate global economic ills and prolong Malaysia's economic woes," the report said.

The main factors weighing down the index were sales, current production output and expected future production.

'Worst yet to come'

Inventory levels rose despite cutbacks in output and weaker prices, and the short-term outlook for export orders was still rather bleak.

"Given the current underlying pessimism in business sentiment, further moderation in economic activity in the coming quarters is inevitable," it said.

"With the slowdown in the US economy deepening and virtually wiping off the prospect of a year-end turnaround in the electronics cycle, the worst is yet to come."

However, MIER's consumer sentiment index (CSI) rose 2.5 points quarter-on-quarter to 98.7 points.

"After languishing for three consecutive quarters, the MIER CSI rose slightly in the third quarter but hardly enough to signal a shift towards optimism," it said.

The increase was mainly due to a rise in the index's expectations component, but consumers' assessment remained lacklustre, the report found.

GDP revised downwards

The government last week revised downwards its 2001 gross domestic product (GDP) growth forecast for a second time to 1.0 to 2.0 percent, because of the greater-than-expected slowdown in the world economy.

Prime Minister Dr Mahathir Mohamad, who is also finance minister, said the Sept 11 attacks on the United States had a "substantial initial impact" on already difficult global economic conditions.

In March, the government cut its growth estimate from 7.0 percent to 5.0 to 6.0 percent after a strong expansion of 8.3 percent in 2000.