Published January 16, 2009

Citi economist expects modest recovery in 2010

Risk of temporary deflation real, but might help restore price competitiveness


RECOVERY from this recession should come in 2010, but will likely be gradual, Citi economist Kit Wei Zheng said at a Citigroup seminar yesterday.

This year, Mr Kit expects the economy to shrink 2.8%, with a record contraction this quarter of 6 to 8%, and two more contracting quarters before a gradual expansion in Q4.

Unlike a few other private sector economists' predictions of a V-shaped rebound for the Singapore economy, Mr Kit expects real GDP growth in 2010 to be a modest 3.8 per cent.

This is smaller than BNP Paribas' expectation of a 4.4 per cent growth, and HSBC economist Robert Prior-Wandesforde's even more optimistic prediction of 5.5 per cent growth next year.

But Deutsche Bank's estimation of 2.5 per cent growth for Singapore's economy next year falls below Citi's predicted tepid recovery.

This year, Mr Kit expects the economy to shrink 2.8 per cent, with a record contraction this quarter of 6 to 8 per cent, and two more quarters of contraction before it reverts to a gradual expansion in Q4.

OCBC, BNP Paribas and HSBC all share Citi's forecast of a 2.8 per cent contraction in 2009, while Deutsche Bank suggests a more bearish 4.5 per cent contraction.

The official forecast ranges from a 2 per cent contraction to one per cent growth.

Economists have pointed to deflation as an emerging threat this year.

Says Mr Kit: 'The risk of temporary deflation in 2009 cannot be ruled out, depending on the duration and depth of the recession.'

However, he added that 'this may not be such a bad thing if it restores price competitiveness', given that Singapore's domestic inflation outpaced foreign inflation last year, eroding cost competitiveness.

Citi still expects a $4 billion Budget deficit to be announced on Jan 22, and a possible total fiscal stimulus of up to $18-24 billion (8 to 9 per cent of GDP) this year, if off-Budget measures are included.

Mr Kit felt that market expectations regarding the Budget 'may be overly aggressive' and may lead to disappointment.

He said that the government needs to run a balanced Budget over the electoral cycle and could choose to 'save its fiscal bullets for election' or for 'incremental fiscal easing' later in the year.

Looking beyond the near term, Mr Kit pointed to possible 'post-crisis' structural challenges that Singapore's economy will have to face, earlier highlighted in a Citi report in December.

Deeper issues such as the 'disappearance of demand' due to export reliance on a crisis-hit US, Europe and Japan, competitive pressures on tech exports, and a widening income gap may be brought to the fore during this recession, he said.