Wednesday, April 15, 2009

Government flags 6-9% contraction

But economists hopeful the worst is over, even if GDP shrinks for next two quarters

(SINGAPORE) Far from rebounding, the economy sank deeper in the first quarter and is now expected to contract by between 6 and 9 per cent this year. But private sector economists - who roundly expected an easing in the rate of decline in Q1 - remain hopeful that the worst is now past, even if the GDP figures stay in the red for another quarter or two.

Releasing flash estimates of Q1 growth yesterday, based only on two months' data, the Ministry of Trade and Industry zeroed in on the on-quarter (q-o-q) figures rather than the headline year-on-year (y-o-y) pace, though in this case, the slump is stark enough on both measures.

In its fourth consecutive fall, GDP shrank 19.7 per cent q-o-q in seasonalised, annualised terms in Q1. After a negative 16.4 per cent pace in the preceding quarter, economists had expected the momentum of contraction to ease, if not turn around altogether, in Q1.

Compared with a year ago, the Q1 contraction amounted to another record 11.5 per cent, though the decline may have been accentuated by base effects - Q1 2008 having been a relatively 'strong' quarter.

But the sectoral manufacturing and services figures, and the weak outlook ahead, prompted MTI to slash the full-year forecast, from a January estimate of 2 to 5 per cent contraction.

'The advance estimates indicate that actual (2009) GDP growth will under-shoot earlier expectations by a significant margin,' the ministry said.

The official forecast for Singapore's 2009 non-oil domestic exports (NODX) was also lowered yesterday - to between minus-13 and minus-10 per cent - and the Singapore dollar effectively weakened about 1.5 per cent, in the Monetary Authority of Singapore's latest policy review.

But economists - several of whom immediately cut their forecasts of Singapore's 2009 GDP pace to within the new official range - also saw in the March trade figures unveiled yesterday, as well as MAS's latest monetary policy statement, some hints that the economy could be bottoming out.

OCBC Bank economist Selena Ling said: 'Q1 GDP flash estimates were way below market expectations but may mark the trough for this current downturn. Essentially, the GDP and NODX growth downgrades were attributed to the larger-than-expected Q1 contraction.'

The 17 per cent y-o-y fall in March NODX actually beat market expectations, and against the preceding month, it rebounded for a second month, and strongly too, by 11 per cent.

DBS Bank economist Irvin Seah said: 'If NODX continues to post positive growth on a month-on- month (m-o-m) basis, we should start to see the economy bottoming out around the middle of this year before a gradual recovery towards the end of the year and going into 2010.'

Particularly as an economy approaches a turning point, changes in sequential terms - q-o-q or m-o-m - show up the underlying trend faster and better than the headline y-o-y numbers, which usually do not reveal a turn until long after the fact.

The flash Q1 sectoral figures show, ironically perhaps, construction to be the sole engine of growth: it expanded by a faster 25.6 per cent, supported by a strong pipeline of housing and infrastructure projects. The manufacturing sector, on the other hand, slumped 29 per cent as all key industries fell sharply. The decline in the services was also broad based.

In its monetary policy statement yesterday, MAS said considerable downside risks to growth remain, but also pointed to recent signs of pick-up in a number of leading indicators.

Citigroup economist Kit Wei Zheng, who yesterday cut his forecast of Singapore's 2009 GDP growth by 1.5 points to minus-6.4 per cent, said: 'We maintain our view that the most intense quarter of GDP contraction is probably behind us, even if the pace of sustainability of recovery remains in question, and a return to positive y-o-y GDP growth is expected in Q409.' But 'a relapse and a W-shaped scenario, though not incorporated in our base case forecasts, remains a risk', he added.

Noting that the economy has shrunk close to 10 per cent in the space of two quarters, HSBC economist Robert Prior-Wandesforde said: 'Ironically, it is actually looking more likely that Singapore GDP will register positive q-o-q growth in Q2 2009.'

Source: Business Times, 15 April 2009

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