With a poor set of second-quarter results released over the last few weeks, evidence that Malaysia's GDP growth for 2005 will likely be below expectations has also now arrived.
The proof comes in data showing that consumer confidence is weakening, inflation is growing and the banks now need to be harder on non-performing loans (NPLs). This combination could potentially hit private consumption, squeezing GDP growth.
On August 29, one local banking group, Commerce Asset Holding, reported a 44% drop in their second-quarter profits, which had fallen to RM150.3m ($39.99m) from the RM269.7m ($71m) recorded for the same period last year.
Commerce was not alone either, as its largest competitor, Malayan Banking, (MayBank) reported a similar trend.
As the economy slows, the banking sector's profits are suffering from the need for higher loan-loss provisions, which are necessary as the banks adopt a tougher stance on some of their NPLs.
"We're going to be more prudent and have higher credit standards," explained Rozali bin Mohamed Ali, CEO of Commerce Asset Holdings, when speaking to OBG recently.
Some worry that the contraction in loans will lead to a further decline in GDP growth, which has already been slowing.
However, others are sceptical as to whether the effect will be so pronounced.
"The issue of excessive loan growth comes up every few years in the media," continued Ali. "It's not a major issue, but it does mean the growth in loans will be less."
One of the biggest factors affecting GDP is also external - soaring oil prices. Yet while these have on the one hand hit production costs in Malaysia, at the same time they have also meant state oil firm Petronas has had plenty of cash from exports to fund its overseas expansions.
Meanwhile, private consumption has been accounting for an increasingly large share of GDP growth.
"While the economy is more synchronised than ever with the global," explained Lim Chee Sing, director of RHB Research Institute, "there is an increased dependency on consumer spending domestically... With a young population this is robust; not as robust as [foreign direct investment] FDI though, and it could come at the expense of saving."
The numbers confirm the situation over the last year or so. In the first quarter of 2004, private consumption represented 56% of GDP, reaching 84% of the total figure by the end of the year, then staying around this mark through the first half of 2005.
Yet inflationary pressure - imported with every barrel of oil - is sure to have an effect on purchasing power and hence confidence, whilst the increasing likelihood of interest rate rises (some predictions say 0.25% by the end-2005) may also stem demand for consumer finance.
A recent report from Deutsche Bank provides some early indicators that consumers may already be suffering from the increasing costs of consumption.
The report quotes a survey from Mastercard which showed that the firm's MasterIndex, a measure of consumer confidence, is at its fifth lowest-ever level recorded for the market. Indeed, the index also showed that confidence had fallen considerably since the previous year.
A random street poll by local daily newspaper The Star also made for an austere outlook. Consumers claimed to be concerned by noticeably rising prices, with one example quoted saying that meat had recently increased in price by over 20% in some stores.
The report form Deutsche Bank also goes on to look at how consumers are equipping themselves though the financial system. Recent demand for loans, it seems, has been to some degree driven by the expectation of tough times ahead coupled with a low interest rate environment today. Total consumer loans grew by 15.1% through June, and 14.7% through July; consumer loans made up around 50% of total borrowings in July 2005.
So between the necessity of profit and the impending rise in interest rates, loan growth has had to slow down. The outlook is not a bleak one though; estimates are of a slowing of the increase in loans issued from 14% in 2004 to 10% in 2005.
Deutsche Bank also highlighted NPLs, stating that whilst they were not a systemic problem, they could affect the profitability of the banks.
A more serious problem, according to many analysts, is that a real blow to consumer confidence could come from inflation.
While the central bank's consumer price index (CPI) shows inflation at 3.3%, it seems likely that it is much higher in some regions. Deutsche Bank focused on the Klang valley, Malaysia's commercial and industrial heartland, where they found a CPI closer to 8% overall, with certain sectors showing levels of inflation that consumers could not fail to notice.
In the report, transport and communications showed price growth of 10.6%, food 7.7% whilst the sin sector (cigarettes and alcohol) showed a whopping 20%. Wages, unsurprisingly, are not growing with corresponding fervour.
Therefore the sources of diminishing GDP growth are not the result of the impeding decline in loan growth. Whilst the external linkages of the economy are hitting firms' costs, diminishing profits and hence GDP growth, it is the indirect effect of this pressure on consumer spending that is going to add fuel to the fire and diminish the biggest domestic source of GDP growth. Tightening the credit tap could therefore just create the need to tighten belts more than expected.