(AFP) Malaysia's economy is likely to contract in the third quarter after terrorist attacks on the United States but will not fall into recession, a private think-tank said today.

The Malaysian Institute of Economic Research (MIER) would cut its gross domestic product (GDP) forecast of 2.0 percent this year amid fresh weakness in the US economy, said its executive director Mohamed Ariff.

"I think (the US situation) is going to delay our recovery process and probably we will have to revise our growth forecast somewhat downwards but I don't think it is going to mean that everything will be thrown out of gear," he told AFX-Asia , an AFP -owned financial news wire.

Prior to the attacks on the US, Bank Negara forecast GDP to grow around 0.5 of a percent in the third quarter.

However Mohamed Ariff said the third quarter was "going to be probably negative growth" and outlook for the fourth quarter was uncertain as "we do not know how things are going to unfold".

He said MIER's 2.0 percent growth "now sounds somewhat too optimistic under the current circumstances" but high oil and palm oil prices could help cushion the impact on the economy.

"I believe that the recovery will probably be delayed by one or two quarters ... We believe that we will not get into a recession, either in a technical sense or a full-blown sense," he added.

Malaysia narrowly escaped a recession in the three months to June as its GDP grew 0.5 of a percent year-on-year and 1.0 percent quarter-on-quarter.

A June downturn would have put Malaysia in a technical recession - two consecutive quarters of contraction - after GDP contracted 3.9 percent quarter-on-quarter in January-March.

Many analysts are expecting the US economy to weaken in the wake of the attacks, with any pickup delayed at least until the first quarter of 2002.

"If that is the case, then ours will probably be later than that because there is a lag effect between recovery there and the impact on the rest of the world," Mohamed Ariff said.

He said the government was likely to continue to be the driver of the economy and expected more pump priming measures and tax cuts in the 2002 budget to be unveiled next month.

"The government will probably go into a sizeable deficit budget - the fourth in a row - and, this time around, I expect the government to combine the expenditure increase with tax cuts because it's important to put some money in the pockets of the people and companies so that it will stimulate consumption demand and investment demand," he said.

Prime Minister Mahathir Mohamad last week said the government was considering further pump priming measures after the attacks on the US.

In March it unveiled a three billion ringgit (789 million dollars) supplementary budget to shore up the economy and will next month cut its official 2001 growth forecast of between five and six percent.