Friday, January 23, 2009

2-5% Contraction Looms As S'pore Sizes Up The Beast

Source : The Business Times, January 22, 2009

Q4's 16.9% q-o-q fall is steepest ever; 2009 outlook altered fundamentally: MTI

The recession hasn't run its course, but is already Singapore's sharpest and deepest downturn to date, the Ministry of Trade and Industry (MTI) said yesterday as it slashed its 2009 GDP forecast to a 'more realistic' contraction of 2 to 5 per cent.

And even if recovery does come in the second half, this would be the most protracted recession in Singapore's history. Indeed, it's quite a different beast from the recessions Singapore has had, MTI says.

Just three weeks ago, a 2 per cent GDP fall was the ministry's worst-case scenario for 2009.

But, following the steepest quarterly contraction to date in Q4 2008, the official forecast has, at the low end, now gone below market projections.

With preliminary December data in hand, the economy was found to have shrunk 3.7 per cent year-on-year (yoy) in Q4 - worse than initial estimates of a 2.6 per cent decline. Year-round, the 2008 GDP pace is a positive 1.2 per cent after a negative second half, thanks to a strong first quarter.

But against the preceding quarter, GDP plunged 16.9 per cent in Q4 as the key export-related sectors, as well as financial services, saw further declines.

'That's quite a serious contraction; almost like a fifth of the economy has shrunk,' Ravi Menon, MTI's second permanent secretary, told reporters yesterday. It is also the sharpest quarterly decline on record.

MTI expects another negative quarter in the current Q1, though not as bad as Q4 2008. Economists believe Q1 will see a worse year-on-year figure, if partly on a high base. The economy has already suffered three consecutive quarters of quarter-on-quarter (qoq) contraction - matching the 2001 duration - and two straight quarters of yoy decline.

New data releases in the last three weeks prompted MTI to fundamentally reassess Singapore's 2009 outlook, Mr Menon said, explaining the new forecast.

Global economic activity has declined faster and deeper than earlier expected, he said.

The repercussions - including a virtual collapse of regional trade towards the end of 2008 - on key sectors of the Singapore economy have also been stronger than anticipated, he said.

'The transmission mechanism has been much stronger than before. Typically, you do not see this kind of collapse in trade so early in the cycle. This has been accentuated by credit freeze in many parts of the world, loss of confidence which is inherently difficult to get a numerical handle on, and the continued bad news that has been coming out of the US, in particular.'

The hits Singapore has taken have extended beyond trade and manufacturing to, now, the financial services sector, which had held up until Q4 and 'is likely to contract further'. The jobless rate is also likely to hit the highs seen in previous recessions.

And how much Singapore's GDP will sink this year hinges on global prospects in the second half, particularly in the US, which is widely forecast to contract 1.8 per cent this year.

A V-shaped global rebound in the second half would pave the way for the more 'optimistic' 2 per cent contraction forecast for Singapore.

'Past recessions in Singapore have always ended with V-shaped recoveries and we cannot discount this possibility,' Mr Menon said. 'But the nature of the current recession is different and the likelihood of a sharp rebound at this point appears low.'

The other end of the forecast range - a 5 per cent contraction - covers 'a reasonably downside scenario of an extended U-shaped profile of the US economy, with no clear recovery in 2009'.

What's clear, in any case, is that this is 'a different kind of recession', he said. It is global in nature, 'different from the dotcom bust, different from the Asian financial crisis', and accentuated by credit problems that take a long time to unwind.

Singapore's worst annual GDP figure came way back in 1964 when the economy contracted 3.8 per cent. More recently, the economy crashed by 2.4 per cent in 2001, and by 1.4 per cent in 1985 and in 1998.

But recessions should be analysed from the peak to trough of the business cycle, Mr Menon pointed out.

'And in that regard this is already shaping up as, by many accounts, the deepest recession.'

The peak-to-trough plunge in growth this round has been the steepest ever. And the cumulative contraction in the economy since Q1 2008 looks to be the biggest to date.

But the recession must also be seen in the context of the previous years of rapid growth, Mr Menon said.

And the Singapore economy is now on a stronger footing - with robust economic fundamentals and ample resources - to deal with the downturn, he added.

Most economists stayed with their GDP forecasts, adding though that the risks are now squarely on the downside. But a few did take the cue to trim their estimates.

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