GIC Says Deep Recession Is But One Of Three Likely Outcomes

Source : The Straits Times, Apr 25, 2008

Risk of worst-case scenario is much higher now though: Tony Tan

THE world could face its worst recession in 30 years, but that is, for now, just one of three possible scenarios that the Government of Singapore Investment Corporation (GIC) has drawn up.

GIC deputy chairman Tony Tan yesterday said the gloomy outlook he delivered at a staff meeting on Monday was not a prediction for the global economy.

As the probability of this worst-case scenario being realised had risen substantially, however, he decided to highlight it at the event.

'Let me state clearly that this is not GIC's forecast for the global economy,' he said, in response to queries by The Straits Times. 'As part of GIC's risk management discipline, GIC continuously reviews a range of economic scenarios which can affect GIC's investment strategy.'

Dr Tan on Monday warned that the world could descend into a deep and long recession.

This, however, can be mitigated if policymakers in the United States and elsewhere take decisive action soon. In particular, he has urged governments to move quickly to address the ailing US housing market that is at the heart of the current crisis.

His remarks were considered too pessimistic by economists. They said this slump, while serious, should not be as bad as those in the 1980s and 1990s.

Dr Tan declined to elaborate on what additional policy action the GIC was looking for.

He clarified, though, that the gloomy outlook he spoke of on Monday was referring only to one of three basic eventualities the GIC was looking into.

The optimistic case is one where the US and the world escape a recession and the credit crisis ends.

The pessimistic scenario is the one that he has raised. It envisions a deep and prolonged downturn across the globe.

Finally, the third possibility straddles the two extreme scenarios, where the US enters a mild recession but the rest of the world economy continues to expand.

In normal times, the central scenario would be the most likely one, with a 'dominant probability', said Dr Tan, while the optimistic and pessimistic scenarios would be outliers, each with much lower probabilities.

'However, in light of the current fluid and uncertain times, the probability of the pessimistic scenario, while not the highest, has risen to a level that warrants serious consideration by GIC,' he explained. 'That is why I highlighted this scenario at the GIC staff conference.'

His comments on Monday likely also reflect the GIC's conservative and cautious investment stance.

Dr Tan has said before that the GIC's investment philosophy is: If you look after the downside, the upside will look after itself.

He declined to disclose the actual probabilities the GIC had attached to each scenario.

His latest comments, however, suggest that the likelihood of each of the three scenarios may be far more similar these days, reflecting the great uncertainty that is noted widely by forecasters the world over.

The International Monetary Fund, for instance, has predicted that global economic growth will clock in at 3.7 per cent this year. But it also attaches a 25 per cent chance for a world recession, which it defines as global growth that is 3 per cent and below.

The world's economic woes today are largely the result of an ongoing credit crisis in the US and Europe.

Economists seem to be growing more optimistic that the risk of a complete financial meltdown has passed.

They note, however, that the possibility of things spiralling quickly out of hand is high. With the world's major financial systems being threatened, and credit being the lifeblood of almost every economy, the ongoing financial crisis-led downturn is not to be sniffed at.


Three basic scenarios

OPTIMISTIC SCENARIO

No recession in the United States or globally, and the credit crisis ends.

PESSIMISTIC SCENARIO

A deep, prolonged global recession.

MIDDLE SCENARIO

A mild US recession, but no global recession.