Silver Lining Amid Gloomy Outlook, Says Barclays

Source : The Straits Times, Dec 17, 2008

Falling oil prices, fiscal measures could boost growth by 11/2 to 3 percentage points

DARK clouds are still gathering on the economic horizon, but a silver lining is apparent too, said Barclays Capital economists yesterday.

The rapid fall in oil prices could provide a larger-than-expected stimulus to economic growth, while the effects from heavy government spending in the region should kick in soon, said Mr Peter Redward, Barclays' chief economist for Asia excluding Japan.

'We do see some significant stimulus coming down the pipeline into the region,' he told a media briefing on the macroeconomic outlook for emerging Asia.

The fiscal stimulus measures being announced by Asian governments alone 'could add up to 11/2 percentage points of growth in the region next year'.

This is a significant contribution, especially since it is 'probably the first time in the best part of 20 years that Asian countries have been in a position to use fiscal policy as a counter-cyclical tool', Mr Redward said.

A lack of reserves amid the Asian financial crisis in 1998 made it impossible for most governments to spend their way out of recession.

Countries in the region will also benefit from the recent plunge in energy prices.

'We estimate that the fall in crude oil prices will inject something like 2.5 to 3percentage points of GDP into the region,' on top of the fiscal expansion, added Mr Redward.

Pump prices in Singapore have already fallen a number of times in recent months, and 'can come down significantly further', he said. 'We're going to start seeing utility bills come down as well.'

Mr Redward is projecting GDP growth for Asia of 7.2per cent this year and 5.2per cent next year - well below previous forecasts.

For Singapore, Barclays economist Leong Wai Ho has cut his growth prediction to 2per cent this year from 3.8per cent. He is tipping a contraction of 1per cent next year. Weakness in the manufacturing sector will spread to other industries, dampening private consumption and raising unemployment, he said.

Job losses are also expected to exceed those in 2001, with unemployment doubling to 5per cent by the second quarter next year.

But the economy could find a bottom in the third quarter, followed by two or three quarters of 'sub-trend growth' before picking up for real. This means stock market investors could see a turnaround in their fortunes as early as the first quarter of next year, said Mr Redward.

Another good sign: Inflation has all but disappeared as a policy concern for governments in Asia. Food and energy prices are starting to fall, and slower economic growth will lower core inflation.

In fact, deflation could emerge next year, with prices declining by a half to one percentage point in economies such as China, Taiwan and Singapore, Mr Redward suggested.