Nov. 21 (Bloomberg) -- Malaysia’s economy shrank the least in three quarters as government stimulus boosted consumption and the global recession eased, strengthening an Asian recovery.

Gross domestic product contracted 1.2 percent in the third quarter from a year earlier, after declining 3.9 percent in the previous three months, the central bank said in Kuala Lumpur yesterday. That was better than the median forecast of a 2 percent drop in a Bloomberg News survey of 19 economists.

Malaysia’s benchmark stock index rose 38 percent in the six months through September as the world began to recover from its worst slump since the 1930s, boosting earnings at exporters including Unisem (M) Bhd. Prime Minister Najib Razak has unveiled 67 billion ringgit ($20 billion) of stimulus measures in the past year to lift the economy from its recession.

“The effect of domestic fiscal stimulus gained momentum, and global economy and world trade activities stabilized and turned around last quarter,” said Suhaimi Ilias, the chief economist at Maybank Investment Bank Bhd. in Kuala Lumpur.

Malaysia increased this year’s GDP forecast last month, joining Asian neighbors in saying the slump won’t be as bad as initially expected. Singapore, which also raised its 2009 estimate in October, said Nov. 19 its economy will grow 3 percent to 5 percent in 2010 after shrinking as much as 2.5 percent this year. Thailand may report Nov. 23 that its recession eased last quarter, according to a Bloomberg survey.

‘Cement’ Recovery

Malaysia’s government may raise its growth forecast for 2010 as it aims to tap private investments to help spur the economy, Second Finance Minister Ahmad Husni Hanadzlah said Nov. 13. The $195 billion economy is forecast to shrink 3 percent this year, less than an earlier prediction for a contraction of 4 percent to 5 percent, and expand as much as 3 percent in 2010, Najib said last month.

“Over the medium term, the continued improvement in exports and acceleration in domestic demand will cement the Malaysian economic recovery,” said Matthew Circosta, an economist at Moody’s Economy.com in Sydney.

Industrial production fell the least in 11 months in September, and the export slump has eased from a 29.7 percent drop in May.

Malaysia has “a high degree of confidence” that its economy will grow in the fourth quarter, central bank Governor Zeti Akhtar Aziz said yesterday.

Signs of Improvement

“The Malaysian economy has exhibited strong signs of improvement in the third quarter and evidence suggests domestic economic activity is gaining strength,” Zeti said. “Going forward, the pace of economic recovery is expected to gain momentum as business and consumer sentiment improves.”

Najib last week told Asia-Pacific business leaders in Singapore that he’s hoping Malaysia’s economy expands at a 5 percent pace after emerging from the worldwide recession.

“There is a potential for that to happen” if there is no setback in the global economic recovery, the government accelerates its fiscal stimulus, and Malaysian productivity levels improve, Zeti said yesterday.

Policy makers are starting to pull back some of their stimulus measures as the global recovery gains momentum. Malaysia plans to cut government expenditure to rein in its budget deficit next year, aiming to narrow the shortfall to 5.6 percent of GDP from a 22-year high of 7.4 percent in 2009.

Interest Rates

Still, Bank Negara Malaysia has left its benchmark interest rate unchanged at a record-low 2 percent for five straight meetings to shore up the country’s nascent economic recovery. Zeti told reporters today that interest rates “continue to be supportive of growth.”

There may be cause to keep interest rates low for a while as economists including Morgan Stanley Asia Chairman Stephen Roach say the global recovery faces risks.

“My outlook remains extremely cautious although we can see the worst is over” for the global economy, Roach said in Singapore yesterday. Asian economies are still too export dependent, he said.

Malaysia’s policy makers next meet on Nov. 24. All 15 economists surveyed by Bloomberg News forecast the overnight policy rate will be maintained at 2 percent.

“Given that the government is scaling back public-sector spending next year and wants to sustain the recovery momentum via private-sector spending, we expect monetary policy to support this next leg of the recovery process,” said Maybank’s Suhaimi.

Malaysia’s manufacturing industry shrank 8.6 percent in the third quarter from a year earlier and exports of goods and services dropped 13.4 percent, according to today’s report.

Investment as measured by gross fixed capital formation declined 7.9 percent last quarter. Private consumption increased 1.5 percent.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Last Updated: November 20, 2009 11:01 EST