Source : Business Times – 15 Jul 2009
GDP contraction may be just 4-6% for the year after Q2 turnaround, but outlook is subdued
The first positive GDP numbers in five quarters are in, and the full-year contraction will now likely be less severe than earlier thought. Going forward, the big question is: will the budding recovery be sustained?
After three previous downgrades, the Ministry of Trade and Industry (MTI) yesterday bumped up its 2009 GDP forecast. It now expects the full-year contraction to be a smaller 4-6 per cent, compared with an April estimate of 6-9 per cent. But a 4-6 per cent decline would still be the sharpest on record.
While private sector economists are caught up with the strong – and widely anticipated – Q2 turnaround, with many prematurely declaring an end to the recession, MTI says the upgrade to its 2009 forecast stems from a less severe contraction in the first six months, and that the outlook for the rest of the year ‘remains subdued’.
Flash estimates based on just April and May data have the economy growing 20.4 per cent in Q2 from Q1 in seasonally-adjusted, annualised terms. This is the first expansion in five quarters – and the strongest quarter-on-quarter (qoq) pace since Q3 2003.
Year-on-year (yoy), the economy was still down 3.7 per cent in Q2 – the third consecutive negative quarter.
The latest figures also show a significant upward revision in the Q1 data. It turns out that the economy shrank a smaller 12.7 per cent qoq (rather than 14.6 per cent as estimated in May) and 9.6 per cent yoy (rather than 10.1 per cent).
In other words, the contraction in the first half of 2009 – 6-7 per cent – was not as bad as earlier thought, although MTI says ‘underlying economic conditions remain weak’.
Notably, the improved manufacturing performance in Q2 (the key driver of the GDP turnaround) came from a spike in pharmaceutical output and electronics inventory restocking – both of which may not be sustained, MTI points out.
The services industries were still weak in Q2, with most still in decline, it says, and the overall outlook for the rest of the year remains largely unchanged – ‘weak recovery susceptible to downside risks’.
Advanced economies such as the US and Europe are still seeing rising unemployment and reduced household spending, MTI notes. ‘Housing markets in many leading economies have yet to bottom out, while financial institutions are still in the process of deleveraging,’ it says. ‘At this juncture, there is no evidence yet of a decisive improvement in final demand.’
Several economists took a cue from the new figures to bring their full-year forecasts in line with the official view. While the more bullish ones think MTI’s revised forecast and cautious stance seem to underestimate some domestic resilience and strength ‘which could yet produce more upside surprises’, others note that the volatile biomedical cluster possibly added 3 points to Q2 yoy growth.
And outside biomed, ‘we are seeing only modest improvements in the demand for Singapore’s exports’, says CIMB’s Song Seng Wun.
The pick-up in manufacturing and exports will likely be ’slow and patchy, with some months of improvements set back by months of decline’, he adds. ‘Until consumers in the US and EU start spending again, which might not happen until late 2010, the recovery in Singapore’s external demand sector is inconclusive. We may still be a year or so away from a real broad-based recovery, when overall labour market conditions improve.’
Other economists, such as Morgan Stanley’s, also reckon that recovery – even if U-shaped – will likely be subdued and uneven, with job losses catching up soon.
Still, the Q2 GDP report is ‘an encouraging sign that the economy is emerging from recession’, says David Cohen of Action Economics.
He sees modest qoq growth in the second half, noting that a potential red flag on the ongoing uncertainty has been raised by visitor arrivals, ‘which, like in Hong Kong, have shown something of a slowdown recently, suggesting a potential drag from the H1N1 flu scare’.
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