Friday, July 16, 2010

Technical recession in this boom year?

Pharma volatility, weird maths may join hands

ONE year after coming off a recession of global proportions, the Singapore economy is headed for possibly a new all-time high growth rate, with GDP expected to surge by between 13 and 15 per cent in 2010. But a technical recession - defined as two consecutive quarters of sequential contraction - within the same year of historic high growth?

That may well be the peculiar scenario shaping up, going by the newly hoisted 13-15 per cent official growth forecast.

As the economists who have dug into the data - just working out the maths, actually - point out, with 18 per cent growth for the first six months in the bag, even if the growth momentum or sequential pace stays flat through the third and fourth quarters, full-year growth would still round out to 17 per cent or a bit more.

Market forecasts of Singapore's 2010 growth, newly bumped up following the release of the latest quarterly estimates on Wednesday, are now mostly in line with the official 13-15 per cent projection, with at least five - from Goldman Sachs, Daiwa Capital Markets, Morgan Stanley, Citigroup and Credit Suisse - going beyond. Goldman Sachs has the highest forecast at 16.5 per cent. Which means that everyone is expecting at least one negative quarter (in sequential or quarter-on-quarter terms) - or what most describe as a 'technical pull-back' from the heady heights of the first six months.

Goldman Sachs, for instance, is looking at a 5 per cent adjusted and annualised q-on-q contraction in Q3, while Citigroup - with a 15.5 per cent growth forecast for the year - reckons it will be more like an 11 per cent pull-back in Q3. In any case, it will be quite a comedown from the blistering 46 per cent and 26 per cent growth notched up in Q1 and Q2.

But at least two forecasters - Capital Economics and JP Morgan - whose full-year growth estimates of 14-14.5 per cent are within the official projection, are looking at two sequential contractions, in Q3 and Q4. A 'technical' recession, in other words.

As a Morgan Stanley research report puts it: 'Our mathematical exercise shows that even if sequential declines of the type seen during the Lehman event in 2008 were to happen, annual 2010 growth would still come round to 13-14 per cent.'

So the official forecast of 13-15 per cent growth necessarily assumes a negative quarter in either Q3 or Q4 - or both. And the Ministry of Trade and Industry has, in fact - though in not quite such words - flagged so as well.

In its statement on the revised 2010 growth forecast, MTI said: 'While year-on-year growth rates in the second half will be healthy, sequential growth from current levels of economic activity will be low.'

It also hinted at what would likely cause the sharp slowdown in growth momentum in the second half. Industry-specific factors, such as plant maintenance shutdowns in the biomedical manufacturing cluster, will drag down growth, it said.

The pharmaceutical volatility that powered the stratospheric surges in manufacturing output in Q1 and Q2 is also likely to plunge the sector into the red, in sequential terms, in the second half. Payback time.

In other words, the second half 'recession' - if it ensues - should be one that is merely statistical beyond the technical sense, with the rest of the economy hopefully still healthy, with no loss of jobs nor decline in incomes and welfare.

Here, prospects are mostly externally driven. On the one hand, Singapore's GDP is now way past its pre-recession peak in Q1 2008 - a good 13 per cent higher, as a couple of economists note. The economy has recouped its recession losses - and scaled new heights.

But the stream of new data out of the US, even in the past couple of days, points increasingly to 'imminent slowdown' ahead.

For now, MTI reckons a double-dip recession in the major economies 'remains unlikely at this juncture', even if the pace of the global recovery has moderated. But that probably accounts for the cautionary stance behind its 13-15 per cent growth forecast - which some see as characteristically 'conservative'. And one that does not preclude the peculiar phenomenon of a 'recession' in a boom year.

Source: Business Times, 16 Jul 2010

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