Why S'pore Trade Breaks Ranks With GDP

Source : The Business Times, February 15, 2008

Three researchers shed light on a conundrum

Three researchers have explained in an article yesterday why Singapore's GDP and trade growth diverged in the past year.

The two figures have tended to move in lock step for export-reliant Singapore, whose small, open economy depends significantly on external growth drivers.

But last year, while real GDP climbed 7.7 per cent, total trade growth - exports plus imports of goods - fell sharply from 13 per cent in 2006 to just 4.5 per cent.

In part, this was due to different performances across sectors, said the researchers, two of whom are from the Ministry of Trade and Industry and the third from International Enterprise Singapore.

Last year's aces - financial services and construction, output of which grew 18 per cent - did not contribute to goods exports and, hence, headline trade growth.

On the other hand, the laggards - manufacturing and wholesale trade, which grew just 6.4 per cent - were the main drivers of the goods exporting sectors.

Another reason for the divergence, according to the article, was a measurement effect, as GDP and trade are calculated on different terms.

Real GDP measures, roughly speaking, the volume of Singapore's output. But trade figures measure the value of exports and imports at current prices and are affected by price changes.

And last year, prices of semiconductors slumped due to increased competition and a capacity glut, dragging down the dollar value of trade.

Despite 4 per cent growth in electronics output, electronics domestic exports still fell 9.3 per cent year on year, meaning higher volume was insufficient to offset the fall in price.

The effect was significant, as electronics trade accounted for about 40 per cent of total trade.

And although oil and commodity prices climbed significantly last year, this could not compensate for falling electronics prices. Oil exports make up about 25 per cent of domestic exports.

The article shows that with prices held constant, total trade last year would have grown 7 per cent - close to real GDP growth.

The divergence between real GDP and trade growth is unlikely to lend credence to the decoupling theory - the idea that strong domestic demand might reduce Singapore's reliance on exports.

Separately, Citigroup economist Kit Wei Zheng said: 'Singapore is still a very open economy. The indirect knock-on effects will still be quite important.'

HSBC economist Prakriti Sofat pointed out that while US growth slowed substantially in Q4 2007, Singapore exports to the United States actually grew about 0.6 per cent year on year, compared with a 4 per cent slump in Q3.

'The other point is that personal consumption has been weak despite hefty wage gains, which has been quite puzzling,' she said. 'However, our assumption remains that households should let loose the purse strings in the period ahead.'