Slight Bump Ahead?

Source : The Straits Times, Dec 31, 2007
THE year past turned up roses in most key indicators: the GDP growth rate, job expansion, corporate profits as well as inward and offshore investment. And the headliner of the year? The long-absent property recovery arrived, to bring with it the most dramatic value appreciation seen in a decade. Adjusted for inflation, Singapore’s real estate is thought to have been the biggest gainer in the world. All of that rosiness showed in the reward premium loaded on personal incomes and the strong festive consumption, which should continue into the Chinese New Year period. We say ’should’ advisedly. Five weeks, the lead-in to the lunar celebrations on Feb 7, is a relatively short time in which to withstand buffeting when Western capital markets are still uncovering the true extent of mortgage-related horrors. What is so far known of the year ahead, for Singaporeans, is that growth forecasts are about two points off the projected final number of 8 per cent for 2007. Could they go lower?

It will depend on global behaviour in the wake of the American mortgage market collapse. The economic historian Niall Ferguson, author of The Cash Nexus, wrote in the Financial Times that the leading finance houses are coming under pressure to put the assets of other ‘novel organisms’ they have designed and invested in back on their balance sheets. He shares the view that the big banks will eventually lose some US$300 billion from sub-prime-related investments. The known writedowns, from Wall Street to Zurich, stand at about US$60 billion so far. Asian capital’s exposure is known to be limited; still less is that of Singapore banks, at least what has been acknowledged.

But capital turmoil and credit contraction in America, whose impact on Singapore is hard to predict with confidence, are coming together with inflationary pressures here which are showing little sign of easing. This is the big imponderable. Inflation, now at a 25-year high, will have to be Singaporeans’ watchword in 2008. The property sector is also cooling. If the slowing is sustained, it is both bad and good. Bad, as real estate’s multiplier effect on GDP growth is considerable; good from the standpoint of broader price stability. One saving grace which will cheer Singaporeans up is that the major Asian pacesetters - China and India certainly, but also South Korea, Japan and some Persian Gulf states - are largely spared the capital whiplash. These nations (and Singapore) are flush with funds with which to pump up growth, if need be. If inflation in China does not get out of hand, the northern region’s aggregate demand will see most of the continent through the worst of the credit and consumption crunch in the economies of the West.