THE dreaded ‘R’ word – ‘recession’ – once whispered only by the most bearish of forecasters is now being cited openly by policymakers.
One of the latest to do so was US Federal Reserve chairman Ben Bernanke. The prospect of a shrinking US economy is no small matter for the world – or Singapore.
The International Monetary Fund has forecast that US economic growth will slow from last year’s respectable 2.2 per cent to a paltry 0.5 per cent this year. And this will drag down world economic growth from 4.9 per cent to 3.7 per cent. This forecast – itself a downgrade from the IMF’s January figure – will probably not be the last word.
Although China and India may have dazzled the world in recent years, the key driver of the global economy in the past decade has been the United States. It accounted for 24 per cent of world GDP growth from 1998 to last year, more than twice the next biggest contributor, China.
Its influence is even larger if one considers that US demand has been a big growth driver for Asian economies. US consumers spent an estimated US$9.5 trillion (S$13 trillion) last year, far exceeding their Chinese counterparts at US$1 trillion and Indians at US$650 billion.
This year, US shoppers will definitely be hitting the malls with far less cash in their wallets than last year. A property market slump that is at the heart of the US slowdown continues to show no sign of abatement. Household wealth fell in the fourth quarter of last year, the first time it has done so in five years.
And falling home values are not the only thing eroding the wealth of US households. Recession fears are prompting employers to axe staff and the unemployment rate has risen to 5.1 per cent. As the downturn deepens – and some American companies are starting to report weaker earnings – more jobs could be lost and wages cut.
Credit, a key source for big-spending Americans, is also drying up. Banks are increasingly reluctant to lend as they fear crippling losses from their sub-prime mortgage investments could emerge in their portfolios – and in these of their trading partners.
As paranoia drives lenders to stash cash – and as banks extend their reluctance to lend to each other to consumers and companies as well – American households will find it harder to borrow.
The credit crisis does not look like it will be resolved soon. In fact, it looks like the worst is yet to come. Even after financial institutions have provided for US$200 billion of write-downs for losses related to the sub-prime debacle, the IMF estimates that the fallout could hit US$1 trillion.
Fears are mounting that the crisis could widen beyond sub-prime mortgages to higher quality housing loans and credit card debt. Fresh rounds of panic in the financial world will hurt not just Wall Street but also Main Street.
Finally, the situation is further complicated by the spectre of rising inflation. Higher prices will turn shoppers away from malls, while uncertainty about future living costs may deter households from making long-term financial commitments.
Inflation presents policymakers with a Catch 22 problem, limiting their ability to address the economy’s deceleration. Even as the Fed cuts borrowing costs to stimulate economic activity, it will have to keep looking over its shoulder to ensure its interest rate cuts do not spur inflation.
The counter-argument to all this doom and gloom is that Asia is still booming.
While few analysts buy the full ‘decoupling’ theory – which posits that Asia and other emerging markets have broken free from their reliance on the developed world – most would agree that the developing world has started to grow its own legs.
‘Asia is driving its own growth. China, India and Vietnam are playing a more and more important role in supporting growth in the region,’ says DBS Bank economist Irvin Seah. ‘And Singapore has benefited from that.’
Accordingly, growth forecasts for Asia and other developing nations are notably less pessimistic than for the US. The IMF expects China, India and 21 other developing Asian economies to expand by 8.2 per cent this year, only a shade less than last year’s 9.7 per cent.
Indeed, the Chinese economy surged 10.6 per cent in the first quarter of this year. Driving this optimism is the rising number of Chinese and Indians joining the middle class.
Energised by pent-up demand from years of living at subsistence levels, they are keen to use their new-found wealth to better their lives. Their absolute expenditure may be dwarfed by that of Americans, but their superior rate of growth will help make up for their smaller stature.
In any case, the US consumer isn’t about to fall off the face of the earth, so Asian exports to the US will not disappear overnight, the optimists argue. Besides, US households will soon be receiving cheques from a US$150 billion fiscal stimulus package.
Where does the Singapore economy stand in all this? It relies on economic powerhouses such as the US and Europe, but it is also part of a booming Asian region.
Singapore manufacturers serving the technology sector are unlikely to avoid a slowdown as demand slows for PCs, cellphones and other gadgets. As they are responsible for the biggest portion of local industrial output – and are collectively the biggest employers too – it will be another dour year for the sector.
But the burgeoning pharmaceutical industry should remain fairly resilient. If anything, these stressful times may actually boost sales of drugs from Valium to Viagra.
Sky-high oil prices should also keep rig builders here busy as high prices make offshore oil production highly profitable.
On the services side, economists note that financial institutions here, and generally in the region, appear to be in relatively good health.
Tourism should stay robust as long as our neighbours – from which the bulk of our visitors hail – are in good shape.
Ongoing big projects, such as the integrated resorts and sports facilities for the inaugural Youth Olympics, will keep the construction industry going. Far from facing a fall-off in demand, builders here are experiencing one of the biggest booms ever, to the point that they face supply shortages and rising costs.
All in, most number crunchers, including those from the IMF, agree with the Singapore Government’s assessment that the economy will manage to grow between 4 per cent and 6 per cent this year. That would be a credible performance for a developed economy like Singapore in any circumstance, let alone one amid a global financial crisis.
Still, these figures may provide little comfort for the man in the street.
As it stands, analysts say it will take some time for the US to recover from its many years of overborrowing and overspending. They predict US economic growth next year will be barely better than this year.
For the regular Singapore worker, bonuses this year are likely to fall from their highs of the past two years as company profits ease. And this time round, thinner wallets will have to stretch further to meet bills that will be bigger with inflation.
So while the Singapore economy may escape a recession, and most workers will not face the cruel axe of retrenchment, it is likely to be a lean year ahead.
First Steps
While few analysts buy the full ‘decoupling’ theory – which posits that Asia and other emerging markets have broken free from their reliance on the developed world – most would agree that the developing world has started to grow its own legs.
Source : Straits Times – 21 Apr 2008
