Recovery?

Source : TODAY, Thursday, January 8, 2009

BNP predicts V-shaped recovery for economy, but others are sceptical

SINGAPORE'S faltering economy may spring back to life next year in a strong rebound, if a startling new prediction by BNP Paribas comes true.

The French bank has become the first major institution to forecast a 'V-shaped' recovery in Asia next year, as aggressive government spending and interest rate cuts kick in region-wide.

In a V-shaped recovery, the economy bottoms out and rebounds quickly. This is often compared to a U-shaped recovery, where the economy sees a slow and tepid rebound over a number of years.

So far, most economic watchers - the Singapore Government included - have warned of the latter. Export demand from developed countries has collapsed in recent months, worsened by a record contraction in US consumer spending.

Prime Minister Lee Hsien Loong said last week it is 'quite likely the global recession will be followed not by a quick rebound but by several more years of slow growth'.

But BNP Paribas is predicting that while Singapore's economy will shrink 2.8 per cent this year, it will bounce back to grow a healthy 4.4 per cent next year.

'The scale of the global policy response - monetary and fiscal - should ensure the recovery is more V- than U-shaped,' said BNP Paribas economist Richard Iley, in a report titled Asia: Apo-

calypse Now. 'In many instances, economies will experience a six- to seven-percentage point swing in growth rates.'

The report, dated Tuesday, slashed growth forecasts for countries around the world this year, in the light of the 'cardiac arrest' suffered by the global economy. It pointed out that things would get a lot worse for Asia before getting better.

But it added that the global manufacturing cycle is likely to improve even before the United States economy stabilises at year-end, which would bring about a 'reasonably vibrant rebound' across Asia. This will be helped by the 'substantial fiscal boosts' and increasingly loose monetary policy stances in the region.

Yesterday, Indonesia and Taiwan both cut rates by 50 basis points, a day after South Korea unveiled a 43 trillion won (S$49 billion) job creation programme.

Singapore is expected to announce an expansionary Budget in two weeks' time.

Economists yesterday said they were less bullish about recovery, as export-dependent Singapore will more likely suffer from continued sub-par growth in developed economies than benefit from a possible sharp rebound in developing nations.

Said OCBC economist Selena Ling: 'Companies' estimates for losses keep being revised upwards, while government moves such as additional liquidity, rate cuts and fiscal stimulus haven't filtered through the system yet because of the confidence crisis.'

She expects a return to economic growth next year but at a slower 1 to 3 per cent rate. She said a real equity markets recovery is too early to call and that it will take a few more quarters before the corporate sector stops feeling the pain.

Citigroup economist Kit Wei Zheng said he has yet to see any 'convincing forward-looking data' that signals a quick and sharp recovery.

'The key assumption here is that the US is not going to be in good shape for some time, and if we assume a U-shaped recovery for the US, there's no reason to assume otherwise for Singapore.'

But at least one economist agrees with BNP. HSBC's Robert Prior-Wandesforde even went one step further: He expects a resounding 5.5 per cent growth rate for the Singapore economy next year.

'History suggests that Singapore and Asia as a whole typically show V-shaped recoveries, particularly when they've had such a big downturn,' he said.

'Monetary policy is likely to be more effective in Asia than in the developed world because we don't see the same scale of financial sector problems. So if we get some growth in the developed world, there's every reason to expect a surprisingly strong improvement towards the end of the year and into 2010.'

In an uncanny coincidence, all three banks - OCBC, HSBC and Citigroup - have the same growth forecast for Singapore this year as BNP Paribas, expecting the economy to shrink by 2.8 per cent.