Weak economic recovery for Singapore on the cards
16 August 2001
The latest forecasts from the National University of Singapore's Centre for Business Research & Development (CBRD) suggest that the Singapore economy should hit bottom in the current third quarter, but continue the recent pessimistic trend in predicting a relatively weak recovery next year.
The CBRD forecasts see Singapore's gross domestic product contracting by 3 percent year-on-year in the third quarter and by 2.7 percent year-on-year in the fourth quarter after an average 1.8 per cent growth year-on-year in the first half. This works out to a full-year contraction of 0.6, comparable to the estimate of another NUS unit, the economics department's Econometric Studies Unit (ESU), which sees a 0.5 percent GDP contraction in 2001.
For 2002, the CBRD forecasts a moderate expansion of 3.8 percent. This is at the bottom end of the ESU's projection of between 4 to 7 percent growth. The CBRD forecast for 2002 is also not far above Goldman Sachs' latest forecast of 2.4 percent growth.
First, though, let's return to the subject of the bottom. The CBRD's forecast indicates that the Singapore economy may be in the process of bottoming. While the fourth quarter GDP may continue to show a year-on-year decline, quarter-on-quarter GDP may flatten or turn positive.
Bearing in mind the fact that the stock market leads the economy, the implication of this forecast on the Singapore stock market is that stocks have probably already bottomed. For the Straits Times Index, that would mean it bottomed at an intra-day low of 1558.04 on 17 April (it closed on that day at 1566.73).
It needs to be borne in mind, though, that the CBRD forecast itself partly assumes that the stock market had, indeed, bottomed in the second quarter. If the stock market and other leading indicators continue to deteriorate, the forecast is invalidated. Other recent news suggests that the bottoming process is highly vulnerable.
In a Fundamental Asia update last Friday, SG Securities also forecasted a further deterioration in growth in the second half of the year. "We are looking at over 2 percent contraction in both Q3 and Q4, and full year at minus 0.4 percent, lower than the government's forecast of 0.5 to 1.5 percent growth," the SG report says. The broking firm sees industrial output contracting by around 12 percent in each of the last two quarters of 2001. SG says that the continued slide in the composite leading index in the second quarter suggests a recovery will come only in the first quarter of 2002 at the earliest.
Preliminary figures from the Monetary Authority of Singapore show that Singapore's money supply shrank for a second consecutive month in June after peaking in April. The broad aggregates of M2 and M3 declined in June from May. Narrow money or M1 grew 0.7 per cent month-on-month after declining slightly in May, but year-on-year growth slowed to 3.5 percent after growing 11 percent in May and April.
In the United States, business inventories fell 0.4 per cent in June, the fifth monthly decline, but sales plunged 1.4 per cent -- the largest monthly decline since August 1992 -- and the inventory-to-sales ratio rose to 1.4. In its Global Economic Forum, Morgan Stanley predicts that US imports will only return to positive growth in the first quarter of 2002, while global semiconductor sales may not see positive growth until the second quarter of 2002. As a result, Asian economies will only see positive export growth in the second quarter of 2002, with export growth rates expected to be "rather muted" next year.
Singapore's non-oil domestic exports (NODX) fell 16.9 percent year-on-year in June. Economists are expecting it to fall another 18 percent in July. In fact, a Channel NewsAsia poll of 9 economists found that NODX is likely to fall by double-digits in the next few months.
In view of the weak numbers above, and the increased risk of a delayed and weaker recovery that they imply, I am downgrading my year-end projection for the Straits Times Index to 1800-1900.
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