Singapore Slump Makes for a Toxic CocktailRupert Walker
Where Singapore leads, other Asian countries must fear to follow. Often considered Asia's bell-weather economy, the Lion City continues to shock its neighbours and economists with data that casts a murky cloud over the region. The Singapore slump is a cocktail that induces an immediate and thunderous New Year hangover.
On Friday, the Singapore government cut its GDP forecast for 2009 to a range of -2% to 1% compared to its projection of between -1% and 2% made in November. The revision came after it announced a contraction of 2.6% in the fourth quarter from a year earlier. It cited a worsening global economic crisis, manifested by sharp falls in global demand, trade and investment.
"This will very likely be the worst recession in Singapore's history," says Citi economist, Kit Wei Zheng. "We're forecasting a GDP contraction of 2.8% this year; while in 1998, during the Asian crisis, GDP fell 1.4% and in the recession after the bursting of the dotcom bubble in 2001 it declined by 2.4%."
The economy contracted at a seasonally adjusted, annualised rate of 12.5% (quarter-on-quarter) in the final three months of 2008, after falling 5.4% (qoq) in the previous quarter, according to Singapore's Ministry of Trade and Industry. This was the largest decline in GDP since 1976 when the authorities started publishing seasonally adjusted data.
It is also the third consecutive quarterly decline, and economists expect the trend to continue in the first three months of this year. For example, Citi expects a likely decline in GDP of between 6% and 8% in the first quarter of 2009 compared with the same period a year ago.
Singapore's economy is highly dependent on overseas demand. Electronics exports have been especially badly hit, falling for 20 consecutive months in November, but the downturn originally started with a collapse in pharmaceutical output, which slumped by 30%-35% year-on-year during the third quarter.
Especially worrying is the reported slowdown in the growth of the services sector. It is usually the reliable engine of Singapore's economy, making up about two-thirds of GDP, but it grew just 1.1% compared with a year ago.
To some extent the drop in growth in the services sector is a gauge of what is happening elsewhere in the region, argues Matt Hildebrandt, economist at JPMorgan Chase. But, he adds, "Singapore is pretty unique in that it is being hurt from all sides". Manufacturing, particularly electronics and pharmaceuticals, has suffered from a big decline in external demand, shipping revenues have fallen because of the commodity price slump, and a large part of the services sector is related to finance and trade, which have been hurt by the global meltdown.
But, write the economists at HSBC in their "Global Economics Q1 2009" report, "all is not lost. History suggests that when the economy does turn, it turns sharply". Reasons to be optimistic include a supportive policy environment as market-determined interest rates fall further and the government is likely to provide a stimulatory budget on January 22 for the fiscal year beginning in April. Measures might include financing support for companies, rent and wage subsidies and a resumption of infrastructure and other construction projects which were shelved earlier last year.
Hildebrandt also reckons that the authorities have plenty of room to provide a fiscal stimulus, which will combine spending on infrastructure and new projects previously put on hold, with a raft of measures such as tax rebates and credits and handouts. He expects "the period of contraction [of the economy] to stabilise in the second quarter, and recovery to begin in the third and fourth quarters of the year, predicated on [JPMorgan Chase's] global view".
A more pessimistic Kit at Citi disagrees. "It will be a prolonged recession, with negative quarter-on-quarter growth expected over four straight quarters, and possibly even five or six [quarters]. The recovery, when it arrives, will likely be gradual, rather than swift, as was the case in past recessions."
The January budget will offer pain relief but is not a cure-all, given the highly open nature of the economy, he argues. Private consumption, for example, makes up only about 40% of GDP, so any fiscal stimulus designed to boost domestic demand will only have limited impact on overall GDP.
Reasons to be cheerful
On the other hand, write the economists at HSBC, regional demand should strengthen during the second half of the year, offering relief to exporters; "wholesale demand"—transport and logistics—represented by port activity, has slumped as regional economic activity has declined. In November, the Singapore port recorded its first decline in traffic volume since 2001.
Also, sharp falls in commodity prices should drive down inflation to 2% from a recent high of 7.5% which will pass through to higher real incomes. The Monetary Authority of Singapore (the central bank) has already apparently relegated the inflation threat to the backroom. In October, the MAS, which uses the exchange rate rather than interest rates as its main monetary policy tool, gave up its anti-inflationary strategy of gradually appreciating the Singapore dollar against a basket of currencies. Instead, it shifted to a "zero appreciation" stance, and announced it would maintain the dollar at the low end of a narrow band. Now many economists believe that a downward re-centering of the currency band is likely.
Surprisingly, the labour market was fairly resilient last year, with almost 200,000 jobs created despite the recession, but the downside is that with productivity having fallen, unemployment could rise more quickly. Unemployment could reach 4.5%-5% this year, says Kit. This will have consequences including a rise in credit card delinquencies and falling residential property prices.
Aware of the pending problem and, as always, pragmatic, the government is trying to expand the safety net, for example by providing subsidies for re-training [introduced last November]. This is especially important in the context of a widening income gap. Not only had the income gap widened, but incomes of those in the bottom 20% actually saw their real wages stagnate between 2000 and 2005, with wages only starting to rise in 2006 on the back of the tight labour market, says Kit. "This group will likely be hit harder in the current recession, which suggests the need for the government to provide some form of support, while not undermining the incentive to work."
Anecdotally, Singapore has become an even more comfortable place for expats with money and a job. There are no longer waiting lists for international schools, you can now just walk into smart restaurants without having to book days in advance, and even find a vacant bar stool at Raffles Hotel to enjoy an optimistic Singapore sling. Of course, the famous shopping malls are crowded, but, some observers suspect, people are often just window-shopping, socialising or simply taking advantage of free air-con.