Barclays: economy to recover by Q4

Source : Business Times – 7 Jul 2009

THE Singapore economy should recover in year-on-year terms by the fourth quarter and grow 5.5 per cent in 2010, according to economists at Barclays Capital.

Peter Redward and Leong Wai Ho say that Q4 GDP could increase 2.2 per cent from last year – after five quarters of declines – boosted by the opening of three new biologics plants and the anticipated opening of Shell’s US$3 billion petrochemical cracker that quarter.

‘The downside risks to GDP are decreasing,’ Mr Leong told reporters yesterday. ‘We are seeing a more lasting bounce in industrial production in Singapore.’

In quarter-on-quarter terms, the April-June quarter could show a sharp improvement, he said. Annualised seasonally adjusted growth could hit 17 per cent, compared with Q1’s 14.6 per cent fall. ‘Recent remarks by officials suggest that lay-offs were down sharply in May and June,’ he added.

GDP forecasts for 2009 remain at minus-4 per cent, but 2010 growth has been revised upwards to 5.5 per cent, Mr Leong said.

‘This revision reflects the improved outlook for Singapore’s key trading partners – most notably China and other Asian economies.’

The revised forecasts signal that the present recession could be shorter – if deeper – than that in 2001-2003. Barclays said that the output gap – the difference between actual growth and long-term trend growth – could close within 10 quarters and trough at 9.2 per cent of potential GDP, compared with 18 quarters and a trough of 6.3 per cent in 2001-2003.

As growth risks fade, the Monetary Authority of Singapore is likely to maintain its neutral policy stance at its next meeting in October. A resurgence of inflation will favour the Sing dollar, Mr Leong said.

Mr Redward said that Asian currencies in general are expected to benefit from fund flows from the West.

Interest rates in the region are above these for US-dollar deposits, which will encourage the appreciation of Asian currencies, as well as equity markets and other asset classes, he said.

Economic growth in Asia will be underpinned by re-stocking of inventory, massive fiscal and monetary stimulus programmes and recovering US manufacturing.

As a result, growth will be ‘robust’ – 4.8 per cent this year in Asia, and 7.7 per cent next year, compared with previous estimates of 3.8 per cent and 6.6 per cent in March.

Strong growth will also mean disinflation will likely prove temporary. ‘Regional inflation is likely to get back to one-3 per cent trend rate by mid-2010,’ Mr Redward said.

With recovery more rapid than anticipated, fiscal stimulus is looking more and more pro-cyclical, he noted.

Mr Leong said that in Singapore, official attention appears to be turning to mid-term ‘more fundamental competitiveness issues’, and a supplementary ‘recession’ budget here is looking less and less likely.