Weathering The Economic Storm

Source : The Business Times, August 13, 2008

ONE week may be a long time in politics, but on the economic front, a sea change in prospects in a matter of weeks is unusual. But we live in unusual times.

Less than a month ago, it seemed as though global inflation would be the issue of the year. While the surge in grain and food prices had abated, oil prices hit another new high in July (but have since backed down). The seemingly relentless spike in commodity prices earlier in the year looks to have ended, though prices are still at levels markedly higher than a year ago. Some of the inflationary effects may still be spiralling their way into consumer prices in many economies, but there is a sense that global inflation is peaking, if not past its peak.

At the same time, there is mounting evidence of economies heading toward recession, one after another. For some exporters and business people, the US economy is, for all intents and purposes, already in recession, even if this is not official. Singapore manufacturers and exporters suffered big falls in demand for their products from the American and European markets in the second quarter. And analysts see no quick turnaround in the big economies - which suggests that monetary policies will be increasingly oriented to battling a slowdown rather than curbing inflation. In Singapore too, there are calls to back off, if not reverse, the currency appreciation stance the government has adopted since October 2007. However, while a strong currency may be unwelcome to exporters in a downturn, it's far from clear that the inflation beast is even close to being snuffed out in Singapore. Targeted fiscal assistance for businesses, such as tax cuts or reliefs, is probably a more effective option than a change in monetary policy, which would have wide (and possibly adverse) effects across the economy.

For now, the global slowdown is reflected most starkly in Singapore's trade figures. The latest Q2 GDP growth number has tanked too, though not entirely from poor external demand. More interestingly, the fact that the low Q2 growth stemmed largely from a pharmaceutical slump - due not to demand woes but industry-peculiar features like product changes and production scheduling - suggests that Singapore's slowdown has been exaggerated by pharma volatility, even if the rest of the economy is still healthy.

Finally, what of the job market? While there may be a change in sentiment compared to a year ago, the jobs pipeline is still strong, with the two integrated resorts and other projects coming on-stream next year. A prolonged slowdown may lead to job cuts in some sectors - particularly manufacturing - but new jobs will still be created in other sectors. This points to a greater need for retraining and flexibility on the part of workers - as well as the need to expand workforce development programmes.

As to how long the global slowdown will last, and how deep it will be, it is still too early to foretell. However, for now, there is every indication that the Singapore economy can weather the storm, albeit at the cost of temporarily lower growth.