Slower Growth, Higher Prices And Uphill Climb Ahead

Source :　The Business Times, February 15, 2008

2008 growth forecast cut to 4-6% in shadow of US uncertainty

The Singapore economy will see lower growth and higher inflation this year, but remains well-poised to ride the upturn when it comes, says the Ministry of Trade and Industry (MTI). Most economists agree.














In view of heightened risks in recent months, chiefly a sharp US slowdown, MTI has shaved its forecast of Singapore's 2008 GDP growth by half a percentage point to 4-6 per cent, which would be down a few notches from 2007's revised 7.7 per cent pace.

The previous 2008 forecast in November had already factored in a US slowdown, MTI second permanent secretary Ravi Menon explained at a media briefing yesterday on the 2007 economic results.

But downside risks have since risen. And while it is not known if the US economy is in fact in recession, 'what we do know is that the US is already experiencing a significant slowdown in growth, and the key uncertainty now is the length and severity of this slowdown', said Mr Menon.

The new official 4-6 per cent growth forecast captures two scenarios. The brighter outlook sees - as current conditions suggest, by MTI's reading - the United States tackling a mild recession in the first half but recovering in the second half on the back of strong fundamentals, and fiscal and monetary stimulus.

Singapore will then likely grow in the upper half of the 4-6 per cent forecast, supported by healthy, if slower, growth in Europe and Japan, and a robust Asia.

But if the US falls into a severe recession brought on by a prolonged credit crunch, with knock-on effects in Europe and Asia, 'sentiment-sensitive and external-oriented' sectors in Singapore, such as electronics, wholesale trade and financial services, will be hit hardest, said Mr Menon.

Even sectors with more of a regional exposure, such as health care and tourism, will not be totally unscathed. The Singapore economy will then likely grow nearer the 4 per cent end of the forecast range.

'In either scenario, we're looking at slower growth this year,' he said.

Already, GDP growth slowed to 5.4 per cent in Q4 last year - down from Q3's 9.5 per cent pace, and lower than early estimates of 6 per cent for Q4. On a quarter-on-quarter basis, GDP contracted by 4.8 per cent.

According to MTI, the Q4 slowdown reflected more the plunge in biomedical manufacturing - which fell nearly 30 per cent in Q4 because of cyclical pharmaceutical downtime - rather than any impact from the US.

Asked about the chances of Singapore slipping into a technical recession - if the economy sees a second consecutive negative quarter in quarter-on-quarter terms - Mr Menon said: 'Most of the simulations we have done don't show that outcome.'

MTI's economics and strategy director, Cheang Kok Chung, also declared it 'quite unlikely', adding that there is 'good potential' for a biomedical rebound in Q1.

In fact, some of the more upbeat private sector economists see a quick rebound in GDP - in the current quarter.

While OCBC Bank's treasury economist Selena Ling thinks the slowing growth momentum from Q4 2007 'could bleed over into Q1 2008', others such as HSBC's Prakriti Sofat see the Singapore economy bouncing back strongly in Q1. One reason - she is confident of a pharmaceutical turnaround 'over the next few months'.

A recent Merrill Lynch report also voiced confidence that the Singapore economy is 'well-positioned to cope with a US downturn this time'.

And P K Basu, the ever bullish chief economist (Asia ex-Japan) of Daiwa Institute of Research, declares: 'I see no reason for even one iota of pessimism about the Singapore economy.'

Apart from the pharmaceutical bleed, Q4 was hardly a weak quarter at all, he says, pointing out that the rest of the economy, notably electronics, was 'accelerating'.

But the 'most eye-popping number', Mr Basu said, was the Q4 manufacturing investment commitments of $8.7 billion - that spells jobs and output down the road.

Depending on the pharma sector rebound, he reckons GDP growth could hit 7-8 per cent in Q1.

'I see no significant downside risk to my 7.4 per cent GDP growth forecast for 2008,' he tells BT.

MTI - which yesterday also raised its 2008 inflation forecast for Singapore to 4.5-5.5 per cent - would be cheered by such confidence.

'Growth will be lower and inflation higher, not a great combination,' Mr Menon said. But the slowdown - after four years of above-trend growth - towards the economy's underlying potential will help ease supply-side constraints and relieve cost pressures, he added.

Beyond 2008, the economy is well-positioned for any pick-up, he said. 'Notwithstanding the weakened macroeconomic picture, the economy remains in fundamentally good shape structurally.'

Rising costs - and Singapore's ever-strong fiscal balances - set the stage for the Budget today. Rebates and other goodies for lower-income households, as well as a cut in the personal income tax rate, are widely anticipated.