(SINGAPORE) The stock market and the economy - in Singapore and elsewhere - have each a life of their own, with little or no link to speak of. That's not just homespun wisdom but the conclusion of various rigorous studies.
But (as is often the case with statistics) play around with the data and - what do you know? - there's not just a link but a pretty good correlation between the Singapore economy and its bourse, at least going by the quarter-on-quarter (qoq) changes in gross domestic product (GDP) and the Straits Times Index (STI).
A graph of the qoq changes in the Singapore GDP and STI since 1997, published in a Barclays Capital research report on Singapore, shows the two lines tracking each other well.
And going by the correlation, assuming that the STI ends at yesterday's close of 2,682 at the end of September, third-quarter GDP can be expected to climb more than 10 per cent on an adjusted, annualised qoq basis, says Leong Wai Ho, senior regional economist at Barclays.
'This is pretty decent, considering that it extends the 21 per cent bounce in Q2 with another double-digit increase,' he adds.
In June, the surge in the STI during the second quarter had pointed to a strong GDP rebound in Q2, after four negative quarters in qoq terms. The correlation suggested a near-20 per cent spike in Q2 GDP. The actual rebound was close enough: 20.7 per cent.
While most studies have found no correlation - if not outright divergences - between the real economy and the stock market in many countries, there's the general factor of confidence and sentiment that comes from positive wealth effects such as rising stock values.
Such feel-good feelings could and would 'induce one to spend on bigger cars and fancier meals', Mr Leong notes.
And while emphasising that his predicted 'more than 10 per cent' Q3 qoq GDP growth is but a 'conditional forecast', he nonetheless points out that the third quarter has been strong months for sentiment-sensitive segments of the economy such as equities and the property market.
But while the qoq pace may be yet another double- digit rate, the Q3 figure in year-on-year (yoy) terms will most probably still be negative, which would be the fourth straight period in the red.
Mr Leong estimates that the economy will still record a small shrinkage of 0.7 per cent yoy in Q3.
Year-round, 'we are calling for minus 4 per cent this year and positive 5.5 per cent in 2010', he says. 'Risks are tilted to the upside.'
Indeed, there's a chance that the contraction in 2009 may be just about 2.5 per cent, he adds, if the brightening outlook continues to improve.
The government's GDP forecast for 2009 stands at a 4-6 per cent contraction. Private sector economists have recently jacked up their full-year forecasts to a median minus 3.6 per cent, from a sharper contraction of 6.5 per cent three months earlier.
Source: Business Times, 11 Sep 2009
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