Rising Worries Over Credit Fallout's Effect On Growth

Source : The Straits Times, Mon, Aug 20, 2007

CONCERNS are growing that the current liquidity crunch hammering the world's stock markets may spill over into the 'real economy' - our factories, our shops and our businesses.

The mood is in stark contrast to the frothy optimism engendered by the economy's strong 8.6 per cent growth in the second quarter.

Local economists may not be cutting economic growth forecasts just yet but they are on high alert for any sign that the ongoing financial turmoil is hurting consumer spending and business investment.

So far, experts reckon that the Singapore economy can still hit the recently raised official economic growth target of between 7 per cent and 8 per cent - if markets stabilise within the next two months.

Otherwise, growth might slow to between 5 per cent and 6 per cent, according to one economist's projections of a 'realistic bad case scenario'.

'The most likely scenario for Singapore is that we will be at the top of the official forecast range,' said Action Economics economist David Cohen. 'There's no reason why it has to spiral into a financial crisis,' he said.

Pointing to the last stock correction in March, he said there were worries then that the selldown would spiral out of control and feed back into the real economy.

'But things just calmed down as people looked around and appreciated that the global economy was pretty strong, as were corporate earnings.'

Still, Mr Cohen admitted that he is a little less bullish than a few weeks ago, when strong second-quarter economic data saw economists racing to bump up their forecasts for the year.

CIMB-GK economist Song Seng Wun said that there have been no signs so far that consumer spending has been affected by the 'wobble' in the financial markets.

He pointed to the recently launched Soleil @ Sinaran condominium in Novena which has been 'keenly bid' for.

'The stock market has been doing so well in the past few years so that even if it falters, the local market is still up for the year,' he said.

However, it will be a different story if financial markets continue to head south.

'If the turmoil continues for more than two months, then the real economy will be hit,' said Mr Song. 'The impact could be felt in the early part of the fourth quarter.'

Citigroup economist Chua Hak Bin said electronic exports, financial services and property are the three most vulnerable sectors here.

Financial services, which have been a key growth driver, may slow to 10 per cent growth, from 17 per cent, as companies pull back on initial public offerings and other capital market activity, he said.

He added that there are signs that deals are being postponed, while the fast- growing hedge fund sector may slow if hit hard by the financial fallout.

Electronic exports will suffer if stock market losses and falling home prices cause American consumers to tighten their purse strings, while rising borrowing costs for companies may stifle business investment across the world.

Singapore's booming luxury property market is also a likely victim as foreign investors have been a key source of demand in the sector, said Dr Chua.

The combination of these could shave 1 to 2 percentage points off economic growth, but the construction and pharmaceutical industries should prove resilient, he said.