2-5% contraction looms as S'pore sizes up the beast

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Published January 22, 2009

2-5% contraction looms as S'pore sizes up the beast

Q4's 16.9% q-o-q fall is steepest ever; 2009 outlook altered fundamentally: MTI

By ANNA TEO


(SINGAPORE) The recession hasn't run its course, but is already Singapore's sharpest and deepest downturn to date, the Ministry of Trade and Industry (MTI) said yesterday as it slashed its 2009 GDP forecast to a 'more realistic' contraction of 2 to 5 per cent.

And even if recovery does come in the second half, this would be the most protracted recession in Singapore's history. Indeed, it's quite a different beast from the recessions Singapore has had, MTI says.

Just three weeks ago, a 2 per cent GDP fall was the ministry's worst-case scenario for 2009.

But, following the steepest quarterly contraction to date in Q4 2008, the official forecast has, at the low end, now gone below market projections.

With preliminary December data in hand, the economy was found to have shrunk 3.7 per cent year-on-year (yoy) in Q4 - worse than initial estimates of a 2.6 per cent decline. Year-round, the 2008 GDP pace is a positive 1.2 per cent after a negative second half, thanks to a strong first quarter.

But against the preceding quarter, GDP plunged 16.9 per cent in Q4 as the key export-related sectors, as well as financial services, saw further declines.

'That's quite a serious contraction; almost like a fifth of the economy has shrunk,' Ravi Menon, MTI's second permanent secretary, told reporters yesterday. It is also the sharpest quarterly decline on record.

MTI expects another negative quarter in the current Q1, though not as bad as Q4 2008. Economists believe Q1 will see a worse year-on-year figure, if partly on a high base. The economy has already suffered three consecutive quarters of quarter-on-quarter (qoq) contraction - matching the 2001 duration - and two straight quarters of yoy decline.

New data releases in the last three weeks prompted MTI to fundamentally reassess Singapore's 2009 outlook, Mr Menon said, explaining the new forecast.

Global economic activity has declined faster and deeper than earlier expected, he said.

The repercussions - including a virtual collapse of regional trade towards the end of 2008 - on key sectors of the Singapore economy have also been stronger than anticipated, he said.

'The transmission mechanism has been much stronger than before. Typically, you do not see this kind of collapse in trade so early in the cycle. This has been accentuated by credit freeze in many parts of the world, loss of confidence which is inherently difficult to get a numerical handle on, and the continued bad news that has been coming out of the US, in particular.'

The hits Singapore has taken have extended beyond trade and manufacturing to, now, the financial services sector, which had held up until Q4 and 'is likely to contract further'. The jobless rate is also likely to hit the highs seen in previous recessions.

And how much Singapore's GDP will sink this year hinges on global prospects in the second half, particularly in the US, which is widely forecast to contract 1.8 per cent this year.

A V-shaped global rebound in the second half would pave the way for the more 'optimistic' 2 per cent contraction forecast for Singapore.

'Past recessions in Singapore have always ended with V-shaped recoveries and we cannot discount this possibility,' Mr Menon said. 'But the nature of the current recession is different and the likelihood of a sharp rebound at this point appears low.'

The other end of the forecast range - a 5 per cent contraction - covers 'a reasonably downside scenario of an extended U-shaped profile of the US economy, with no clear recovery in 2009'.

What's clear, in any case, is that this is 'a different kind of recession', he said. It is global in nature, 'different from the dotcom bust, different from the Asian financial crisis', and accentuated by credit problems that take a long time to unwind.

Singapore's worst annual GDP figure came way back in 1964 when the economy contracted 3.8 per cent. More recently, the economy crashed by 2.4 per cent in 2001, and by 1.4 per cent in 1985 and in 1998.

But recessions should be analysed from the peak to trough of the business cycle, Mr Menon pointed out.

'And in that regard this is already shaping up as, by many accounts, the deepest recession.'

The peak-to-trough plunge in growth this round has been the steepest ever. And the cumulative contraction in the economy since Q1 2008 looks to be the biggest to date.

But the recession must also be seen in the context of the previous years of rapid growth, Mr Menon said.

And the Singapore economy is now on a stronger footing - with robust economic fundamentals and ample resources - to deal with the downturn, he added.

Most economists stayed with their GDP forecasts, adding though that the risks are now squarely on the downside. But a few did take the cue to trim their estimates.

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January 22, 2009 Thursday

Growth may sink to -5%

Govt cuts forecast again to a range of -5% to -2%; sharp rebound unlikely

By Alvin Foo


THE Government has downgraded its growth forecast again amid what it brands the 'sharpest, deepest and most protracted recession' Singapore has ever faced.

What used to be the worst-case scenario a few weeks ago has now become the best outcome with the economy tipped to contract by between -5 and -2 per cent this year, according to the Ministry of Trade and Industry (MTI) yesterday.

The new figures reflect just how fast the global economy is deteriorating: just three weeks ago, the MTI forecast that gross domestic product (GDP) growth would come in at -2 to 1 per cent instead of between -1 and 2 per cent.

A 5 per cent slump this year would be Singapore's worst, beating the record of -3.8 per cent seen pre-independence in 1964. The 2001 recession saw a 2.4 per cent contraction.

The MTI said the downward revision was largely due to a faster and deeper decline in global economic activity, and stronger ripple effects on key sectors.

Said Second Permanent Secretary Ravi Menon yesterday: 'What took us by surprise...is the depth of the deterioration in global economic activity and, second the spillover it has on the region and Singapore.

'Typically you do not see this kind of collapse in trade so early in the cycle.'

Downgrades in consensus forecasts for key economies such as the European Union and those in Asia, plus poor retail sales and jobs figures from the United States also added to the more pessimistic outlook.

Mr Menon said the upper end of the forecast is based on a 'V-shaped' rebound of the Singapore economy in the second half of this year, while the -5 level stems from an 'extended U-shaped' scenario with no 'clear recovery' this year.

'Past recessions in Singapore have always ended with V-shaped recoveries... but the nature of the current recession is different and the likelihood of a sharp rebound appears low,' he added.

OCBC Bank economist Selena Ling said: 'They appear to have bitten the bullet and included a worst-case scenario of -5 per cent, which supposedly covers most of the potential downside risks.'

Dr Chua Hak Bin, Citigroup's head of Singapore equity research, added: 'You also probably want to paint a scenario that could be fairly dire if you want to actually ask the public, the Parliament and the President for the right to tap on the reserves.'

Preliminary estimates showed that the economy grew 1.2 per cent last year compared with 7.7 per cent in 2007. Updated data will be out late next month.

Other figures out yesterday showed things were worse late last year than initial data showed. GDP shrank by 3.7 per cent in the fourth quarter, worse than the 2.6 per cent fall in the advance estimate.

It also plunged about 16.9 per cent in the last quarter from the previous three months - steeper than the 12.5 per cent retreat in the flash estimates and the largest such quarterly decline on record.

Economists say this year is likely to see year-on-year GDP contractions in the first three quarters before mild growth in the final quarter. They add that the slump should be most severe in the first quarter.

Manufacturing is estimated to have contracted by 4.1 per cent last year, down from growth of 5.8 per cent in 2007, as key sectors were hit by the rapid drop in demand from major markets especially, in the final quarter last year.

Total trade rose 9.6 per cent to $928 billion last year, but is tipped to slump by between 17 and 19 per cent this year - down from the previous forecast of a 6 to 8 per cent drop.

Non-oil exports are projected to dip between 9 and 11 per cent, compared to the previous prediction of between -1 and 1 per cent.

A silver lining is that lower oil and food prices should rein in inflation, which is now tipped to be between -1 and 0 per cent instead of 1 to 2 per cent. But job losses will rise, with unemployment reaching levels seen in past recessions.

However, sectors such as health, construction and the civil service will continue hiring, and new jobs will be created from the integrated resorts and recent investments in manufacturing.

HSBC economist Prakriti Sofat said: 'All eyes will now be towards the Budget, which no doubt will be aggressive, with businesses and households receiving a fair bit of help.'

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