Recession Unlikely, But Expect Some Gloom

Source : The Straits Times, Jan 24, 2008

S'pore can rely on construction projects to drive growth even if US downturn occurs

THE week is turning out to be a most unsettling one for the world - and Singapore.
Stock markets have crashed while a succession of assessments pronounced the US already in recession - Merrill Lynch being the latest to join the chorus.

Policymakers, not least the US Federal Reserve, are being forced to make unprecedented moves to stave off a downturn and calm the market maelstrom.

VOLATILE MARKET: The stock index at One Raffles Quay showed Asian markets have rebounded yesterday in response to the US interest rate cut. -- ST PHOTO: ALBERT SIM

Companies and financial investors, no doubt, are already feeling the pain from steep declines in share prices across the board.

And even those with little interest in finance or economics must be sitting up to the alarming headlines that seem to paint a gloomier picture with every passing day.

Yet what exactly should Singapore and Singaporeans be worried about?











Certainly, the heart-stopping action in the past three days on the Singapore stock market has clearly shown financial investors that markets here and in the region are not independent of developments in the world's largest economy.

But even those who do not invest should be interested to know if, and how, a US contraction will affect the local economy.

If history is anything to go by, a US recession has always dragged Singapore's economy into the red.

Will things be different this time round?


Dip in exports

THE manufacturing sector is one of Singapore's key growth engines. With Singapore's small domestic market, its health depends critically on external demand for its exports.

A slowdown in the US, the biggest market for local exports after Europe, will inevitably hurt manufacturers that sell most of their wares overseas.

The electronics sector will be one of the more vulnerable, as demand dries up for computers, phones and other gadgets.

Shipping companies, air cargo firms and other logistics firms will also take a hit, as will wholesale traders.

In fact, exports are already starting to slide with contractions in the past two months.

Much has been said in recent months about Asia weaning itself off Uncle Sam in this regard.

Some argue that the fast economic growth in recent years has given rise to an increasingly affluent middle class in Asia that can act as a counterweight to the almighty American consumer.

Flourishing trade within the region appears to support these 'decoupling' theories.

But experts say this may not be true, because much of the movement of goods within Asia is merely a manifestation of global production lines that are not contained within a single factory but span across countries.

For instance, microchips made in Singapore are shipped to China, where they are assembled, along with other imported components from elsewhere in the region, into a laptop computer that is ultimately bound for the US.

This trend is backed by empirical studies, which show that half of intra-Asian trade is driven by final demand outside the region.

In any case, the Asian consumer may not be as resilient as some are inclined to think.

Citigroup economist Chua Hak Bin warns that Chinese consumers, often held up as an important alternative source of demand, may not be as enthusiastic about a shopping spree if the export-driven factories many of them work in face tough times.

There are a few bright spots, however. Oil rig production should continue to be robust given that shipyards here are already fully booked for the next few years.

Pharmaceutical sales, which arguably are driven less by economic cycles, could also provide support.

New plants in the electronics and pharmaceutical sectors coming on stream later this year may also bolster exports, although the extra capacity will help little if demand caves in.


Financial contagion

WHAT about the services industries, which spectacularly contributed about 70 per cent of the economy's phenomenal growth of 7.5 per cent last year?

Services geared at overseas markets and customers may see business slowing down.

But the deceleration may not be as acute because Singapore's services industry is significantly driven by Asian economies, which are expected to fare better than those in the West.

And the Formula One race scheduled in September will also provide a boost to tourism-related activities.

But the financial sector, with its globalised nature, may prove to be a big spoiler. It will be hit harder as the shattered confidence of the Western financial sector spills over to Asia.

Companies are already postponing fund-raising activities. Share trading volumes are falling as stock market turbulence keeps investors, and private banking clients, on the sidelines.

Foreign banks that have been badly hit by the US sub-prime mortgage crisis may also turn more cautious about lending and hiring here.

On the domestic front, the uncertainty about the US economy may prompt property investors to hold back on purchases, which will hurt real estate-related services. It may also slow or stall property price increases.

What this means is that the local consumer who is looking at stock market losses and the absence of surging home values could hold back on spending.

And this will ultimately drag down sectors such as retail and restaurants.


Betting on construction

AMID the gloom, the building sector will most likely survive the US recession unscathed.

Mega projects like the integrated resorts will keep construction firms busy, as will the huge pipeline of projects from a property boom over the past two years.

Barclays Capital economist Leong Wai Ho says these projects are unlikely to be derailed by US - or global - economic woes and will be a key growth driver for the local economy this year.

So, all things considered, what will 2008 - hobbled by a failing US economy - be like for Singapore?

For all the growing worries about the US and the general world economy, economists reckon Singapore and Asia will escape a recession this year.

For one thing, the jury is still out on where the US is headed.

Many forecasters are still hoping for a benign slowdown, aided by aggressive interest rate cuts by the American and European central banks.

Even among the more bearish, and their number appears to be growing by the day, the consensus is that Singapore and the region are still expected to expand, even in the face of a twin recession in the US and Europe.

Regardless of the final GDP growth figure, it will represent a significant downshift after four years of spectacular economic growth in Singapore.

Even if the economy stays in the black, Singaporeans will need to take heed, and make their own adjustments for less exuberant times.