MAS Sees A Long, Painful Trek Ahead

Source : The Business Times, April 30, 2009

Swine flu adds new twist as S'pore prepares for extended period of sub-trend growth

The worst is probably over for Singapore in the downturn, but recovery - when it comes - will be prolonged and painful, with many sectors in for an extended period of sub-trend growth, says the Monetary Authority of Singapore (MAS).

Plus, the swine flu outbreak has added a new spin to an outlook already fraught with uncertainties, it notes in its latest biannual macroeconomic review published yesterday.

With almost 60 per cent of Singapore's exports headed for economies 'expected to be in outright recession in 2009', GDP here fell sharply in the last two quarters.

'Barring further significant external shocks, the most intense phase of this downturn for Singapore may have already occurred,' MAS says, adding though that a decisive rebound is not expected this year.

Instead, the climb out of recession will likely be slow, gradual and possibly 'marked by several false starts', as weak global demand and structural strains continue to weigh on the domestic sectors.

With the economy having lost almost 12 per cent in Q1 from its year-ago peak, the official projection of 6-9 per cent GDP contraction for 2009 means that the quarterly sequential expansion for the remaining three quarters of the year would be significantly less than the 9.5 per cent average (seasonally adjusted and annualised) in previous recessions, the MAS review says.

Indeed, in all three previous downturns - in 1985, 1998 and 2001 - the Singapore economy rebounded from the trough and returned to its previous peak within three quarters, the report notes. 'In this downturn, however, it will probably take longer to return to its previous peak.'

MAS expects the job market will likely weaken further, 'although prospects vary across industries', and reckons that net employment (excluding construction) by Q4 2009 could shrink by more than the net job loss recorded during the 1998 Asian financial crisis and the 2001 global IT downturn.

The manufacturing, financial and trade-related industries, in particular, may see severe job losses. Nominal wage increases will also likely be 'relatively muted' this year, compared with the 5.4 per cent rise seen in 2008.

The central bank maintains, however, that there is 'little likelihood at this point in time of a persistent, broad-based and self- sustaining drop in consumer prices' - or debilitating deflation - even with the inflation rate expected to fall to zero, or possibly minus one per cent, this year.

On the newly-developing swine flu epidemic, MAS says it is not certain at this stage how the outbreak will impact global economic prospects, and the situation bears close watching. There could be repercussions for the domestic economy, notably the transport and travel-related industries, initially through the immediate and direct transmission channels.

The confluence of adverse factors depressing global growth will likely persist into the next few quarters, MAS says. 'Global demand is unlikely to rebound strongly, with the major economies mired in an extended period of sub-par growth. The stresses in the global financial system are expected to weigh on economic activity for some time.'

A vastly open economy like Singapore's would be particularly susceptible to the global headwinds, especially as external demand has grown 'markedly' over the last decade as a source of growth.

But the extreme openness of the Singapore economy should also enable it to pick up more strongly than other countries when the global recovery eventually gets underway, MAS says.