Malaysia's economic growth is expected to slow to 5.4 percent this year from 6.1 percent in 2007, and could drop as low as 4.0 percent if the US is hit with a recession, forecasters said today.

The Malaysian Institute of Economic Research (MIER) said the economy expanded by 6.4 percent in the fourth quarter of 2007, and it pushed its full-year projection from 5.7 percent to 6.1 percent.

But the independent think tank said its 2008 forecast is threatened by the risk of recession in the United States as well as rising oil and food prices on the domestic front.

"Our projection is based on the fact that the US will be able to pull from the brink of a recession," MIER director Mohammed Arif told reporters.

"I think we are looking at a 4.0 to 5.0 percent forecast if it is a mild and short-lived recession in the US," he said.

"Our economy in 2008 may not be performing as well as it did in 2007, although authorities are putting on a brave face, but we think we should brace ourselves for a slowdown."

Ariff said he expected inflation to reach 3.2 percent in 2008 due to the expected dumping of oil subsidies and the rising cost of living. Inflation reached 3.6 percent last year due to spiralling global oil prices.

The MIER said it expected the central Bank Negara to marginally adjust its overnight policy rate by mid-year.

Keeping interest rates down

"We expect the central bank to do a kind of balancing act here because on the one hand it has to come to terms with the slowdown and stimulate the economy and it has to contain the inflationary measures," Ariff said.

"To stimulate the economy you need to keep the interest rates down, but to combat inflation you have to push rates up -- a balance has to be struck."

Ariff said he was hopeful the government will this year review its policy on offshore trading -- the last of a raft of currency controls introduced a decade ago during the Asian financial crisis.

"There is hardly a need for us to be fearful of market shocks if we expose the ringgit to offshore trading," he said.

The MIER survey also showed business confidence cooling in the fourth quarter of 2007 with the Business Conditions Index declining to 105.5 points compared to 117.5 points in the third quarter.

Higher food prices and bad weather also led to a drop in the Consumer Sentiment Index which registered 110.7 in the fourth quarter compared to 117.5 in the previous quarter.

However, the automotive industry index saw a strong improvement, surging from 109.7 in the third quarter to 136.5 in the fourth quarter.