Wednesday, July 15, 2009

The new normal

EVEN for a high-beta economy like Singapore, 20.4 per cent is an eye-popping number for quarter-on-quarter GDP growth - which is what we look to, for early signs of an economic turnaround.

So when the Ministry of Trade and Industry (MTI) yesterday revealed that this was the advance estimate of the Singapore economy's performance in the second quarter - the best since the post-Sars bounce in 2003 - it triggered some euphoric responses, among them that the economy has 'roared out of recession' and is 'back with a vengeance.'

To some extent, this is understandable. We have, after all, endured four consecutive quarters of contraction - a first in Singapore's economic history. The 20.4 per cent pace is also way above what most economists were expecting, which was in the range of 13-15 per cent. Moreover, there is an expectation that the number from Singapore (the first Asian country to report second-quarter growth figures) will soon be followed by news of similar rebounds in other countries of the region, which will add credence to the view that global trade is normalising and Asia is bouncing back.

But in Singapore's case, the reasons cited for the jump in growth do not give confidence as to its sustenance. As the MTI pointed out, much of the growth is the result of a dramatic improvement in the performance of manufacturing because of a spike from the notoriously volatile biomedical cluster and a jump in electronics output due to restocking. Both could be temporary phenomena. And especially if services growth remains subdued, it is by no means assured that Q3 growth will be even positive, quarter on quarter, let alone strong.

Credit markets
There are glimmers of hope, however. One is that the credit markets are in the process of normalising. Among the many surprises of the global crisis was the exaggerated extent to which credit flows impacted trade flows; when the credit markets seized up in the last quarter of 2008, exports from Asia collapsed spectacularly, by 20-50 per cent (depending on the exporting country) in year-on-year terms - far in excess of any decline in final demand. It stands to reason that as credit markets return to normal, trade flows will bounce back substantially - although not by as much as they had fallen because demand is softer. So, probably from Q4 2009, we should not be surprised to see double-digit growth in exports from several Asian countries - including Singapore - in year-on-year terms for a temporary period.

A second positive is that economic stimulus measures worth more than US$2 trillion in aggregate are in force throughout Asia, and in the United States. Although this expenditure only partially compensates for the credit withdrawn from the global economy since the second half of last year as a result of cutbacks in bank lending and the collapse of the shadow banking system, nobody doubts that the stimulus will have positive effects on economic activity. We don't know for sure which parts of which economy will benefit and by how much, but as one fund manager put it, a big fiscal stimulus is like a shotgun - it's going to hit something.

Third, monetary policies are easy across the region and in the world's major economies, and will remain so for the foreseeable future, which will prevent economies from backsliding. The only question is how fast and how much banks will lend. As at now, they are not in a hurry.

Consumer demand
What matters ultimately is final demand. Only when that returns can we be certain that an economic recovery will be strong and sustained. And here, the story is not good. The US consumer - the single biggest source of global demand - is still reeling. Unemployment in the US (9.5 per cent) is high and rising. Even employed workers have taken wage cuts. Housing prices are still correcting, which impacts consumer wealth. European consumers are not faring much better. Even taken together, higher Asian consumption cannot compensate for the lost purchasing power of US and European consumers, fiscal stimulus notwithstanding.

Thus, other than for China and India, which can leverage their domestic demand, a return to high growth is not yet on the cards for any Asian economy. However, the Singapore economy is emerging from the long dark tunnel of negative growth. It is returning to normal, but which for the time being will be a 'new normal' of modest, sub-par growth. It is a time for relief, not euphoria.

Source: Business Times, 15 July 2009

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