Wednesday, August 12, 2009

MTI refuses to get carried away by Q2 rebound

Recent surge likely one-off; no firm signs of upturn in external demand

(SINGAPORE) The numbers here finally show a decisive rebound. But, with no sign of any strong pick-up in external demand, the Ministry of Trade and Industry (MTI) remains decidedly cautious about the outlook: Recovery in the second half of the year will probably be sluggish and modest, it says.

While the second-quarter GDP numbers have come in slightly better than the earlier flash estimates - down 3.5 per cent year on year but up an adjusted 20.7 per cent quarter on quarter - and the exports outlook has improved a little of late, MTI's assessment of Singapore's near-term prospects hasn't fundamentally changed, the ministry's second permanent secretary Ravi Menon told a media briefing yesterday.

As in July when MTI upgraded its GDP forecast to a 4 to 6 per cent contraction, the growth outlook remains 'weak and subdued', he said.

The Q2 uptick, to begin with, is likely to have been exceptional and can't be expected to persist in Q3 and Q4, he added.

The manufacturing 'resurgence' in Q2 - it grew nearly 50 per cent over Q1 - came largely from a sharp spike in pharmaceutical output and electronics restocking, as has been well noted. And pharma orders tend to be driven by firms' own production decisions rather than external demand.

Plus, indicators of final demand remain weak, Mr Menon pointed out.

While the Singapore economy has 'probably bottomed out' and 'we are past worst of the recession', with more green shoots of recovery in sight, the encouraging indicators are mostly forward-looking or tied to sentiment.

'They do not reflect recovery in actual demand conditions,' said Mr Menon of the uptrend in, for instance, the OECD composite leading index, China's purchasing managers' index, the uptick in US housing prices, and rebound in global asset markets.

US personal consumption, on the other hand, hasn't yet picked up and the US labour market remains very weak, he noted. 'The lynchpin for a global economic recovery remains US private consumption.'

Given the weak final demand in the advanced economies, recovery in the regional and domestic economies will be 'neither quick nor strong', he said.

Singapore's forecast of 4 to 6 per cent contraction for 2009 reflects this subdued outlook, which Mr Menon believes will likely persist into 2010.

'We will hit close to minus 4 per cent if the level of GDP stays at around the current level in the second half of the year,' he said.

But if the economy dips in Q3 or Q4, the contraction will be closer to 6 per cent.

Speaking at an event at Jurong Shipyard yesterday morning, Trade and Industry Minister Lim Hng Kiang warned that it is too early to cheer or celebrate the Q2 economic rebound.

'The path to a full and sustained recovery ahead will be a challenging one,' he said.

Economists all see MTI as being highly cautious. Goldman Sachs' analysts, for example, note the improved trade and domestic demand in Q2, with a smaller fall in consumption and investment.

MTI's Mr Menon also basically dismissed the need for more policy stimulus. Indeed, given the current recovery trajectory - slow but steady - the debate elsewhere has in fact turned to whether it's time to withdraw the pump-priming.

As OCBC Bank economist Selena Ling notes, 'we cannot discount the possibility that some of the currently ample fiscal and monetary policy stimulus may be withdrawn, albeit likely in a gradual manner, in 2010 when the recovery trajectory is more firm'.

For now, however, liquidity in the banking system will be kept higher than usual, with a return to normal levels only later, a Monetary Authority of Singapore official said yesterday.

While MTI is guarded, most economists are cautiously optimistic that the economy may continue to pick up sequentially in Q3 and Q4, if not quite at the spectacular Q2 pace.

Morgan Stanley's economists believe that Singapore's 'upcoming' recovery is likely to be uneven, but its rebound in 2010 will probably be sharper than the neighbouring economies'.

Source: Business Times, 12 Aug 2009

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