Published October 3, 2008

Singapore recession will last several quarters: Citi economists

Worst will likely be in H1 2009, they predict in new report


(SINGAPORE) It's no longer a question of if but how severe, and not just 'technical' in nature.

The recession widely expected to have set in here may not be short and shallow but could well last several quarters, say Citigroup's Singapore economists.

And that's several quarters of year-on-year contraction in GDP, not just quarter-on-quarter dips, with the worst likely coming some time in the first half of 2009, the Citi analysts, led by Chua Hak Bin, write in a Singapore Strategy report published this week.

A technical recession in Q3 - with two consecutive quarters of GDP declines - had pretty much been on the cards even before the negative August manufacturing data released last week all but confirmed it. Economists across town have cut their estimates of Singapore's 2008 growth to sub-4 per cent.

Among the more bearish, Citigroup economist Kit Wei Zheng pared his GDP growth forecasts to 2.8 per cent for 2008 and 2.5 per cent for 2009. He reckons the upcoming Q3 flash estimates will likely show a one per cent dip from a year ago, and a 7.4 per cent fall from the preceding Q2.

Declaring that they are 'not ready to call the bottom', his Citi analyst colleagues say the severity and duration of the recession is still unclear, and will depend on how the global downturn and global credit crunch pan out.

'A protracted downturn, with a continued contraction in Q4 2008 and early 2009, cannot be ruled out,' they say.

Bear markets typically do not hit bottom until the economy is at or past the worst quarter of a recession, they note, and the current slump is only in its 50th week, still short of the average 85 weeks in previous bear markets with recessions.

The 1985-86 and the 2001 recessions each saw four quarters of year-on- year GDP contraction, while the 1997-98 Asian crisis had three. The 2003 Sars recession was a 'short' single-quarter downturn, due largely to successful disease containment rather than economic factors.

But now more than half of the world's economies (notably the major and big ones) are at risk of recession - with the US and the UK, in particular, on the brink of a systemic financial crisis.

Singapore's financial services will soon feel the impact of the credit crunch and global consolidation - and job growth may turn negative next year, the Citi report says.

Standard Chartered Bank economist Alvin Liew also believes the recession at hand here will not be short and shallow, as the externally driven Singapore economy lacks 'buffer' sectors such as commodities to help offset some of the global slump.

His forecasts see a small 0.4 per cent Q3 GDP growth from a year ago, but one risk is that the sequential contraction could be slightly deeper and could well lead to a year-on-year contraction - 'something not seen since June 2003', he notes.

Stanchart's GDP forecasts for Singapore have been slashed to 3 per cent for 2008, and 2 per cent for 2009.

'This is not just about export competitiveness, but . . . the implications of a protracted external demand collapse, and subsequent impact on domestic demand,' Mr Liew says.

Furthermore, inflation is not easing fast enough, he notes. Imported inflation 'is still hounding us', with core inflation remaining elevated at 5.8 per cent in August, he estimates. It would, therefore, be premature to switch entirely to an easing or even neutral monetary policy, he says.

Amid the gloom and doom, one economist who remains relatively if cautiously optimistic is Daiwa Institute of Research's Prasenjit K Basu.

While conceding that a technical recession 'unfortunately, looks rather likely', he maintains that it will be just that - a short technical recession, one due largely to the volatile pharmaceutical sector. The latest investment commitments in Singapore have been the strongest yet, he points out.

The financial turmoil will likely take its toll here in Q4, with reduced turnover volumes and growth, but the overall impact will not be huge, in his view.

Indeed, Mr Basu believes Asia's 'relative strength' will show up amid the global and US financial meltdown.

'Even in the near term, we believe Asia will stand out as a relative pillar of strength in the global economy, supported by the resilience of intra-emerging economy demand,' he said.