Singapore economy may have hit bottom
28 December 2001
The latest figures on the Singapore economy seem to suggest that it may already be hitting a bottom.
Non-oil domestic exports (NODX) in November fell 21.1 percent from a year ago to $8.0 billion. While that is still a large drop, it is smaller than the 21.7 percent fall in October and the much bigger 30.7 percent fall in September. In absolute figures, apart from the October figure of $8.4 billion, the NODX performance is also the best since May this year.
Manufacturing output in Singapore fell 13.6 percent in November compared to a year ago. This is a significant improvement over October's 20.6 percent fall. In fact, month-on-month, the November industrial production index actually rose 8.6 percent.
So it is likely that the Singapore economy hit bottom sometime in this fourth quarter of 2001. Month-on-month and quarter-on-quarter comparisons are likely to look better from now on, even though year-on-year figures will remain negative.
The Singapore stock market bottomed on 21 September 2001 with the Straits Times Index closing at 1,241.29. That means that the economy is bottoming within one quarter of the stock market, an unusually short lag. But this anomaly can be easily explained by the fact that the sharp drop in September was related to the terrorist attack on 11 September. The attack produced a reaction in the stock market that is proving to be out of proportion to the real impact on the economy, which appears to be already dissipating.
Just the day before the attack, on 10 September, the Straits Times Index had closed at 1,558.45. This is a level that was essentially first reached in April 2001. That month, the lowest close for the Straits Times Index was 1,566.73 on 17 April. After that, the market basically went sideways for the next five months. Therefore, the true economically-related bottom in the stock market probably first formed back in April and could be said -- somewhat arbitrarily I must admit -- to have been completed in early December, when the Straits Times Index recovered the pre-attack level and has stayed above it ever since.
Translating this to the economy, it now becomes reasonable to suggest a bottom forming in the fourth quarter of 2001, implying a two-quarter lag behind the stock market, not an unusual interval. But if the prolonged bottom-formation in the stock market is replicated in the economy, then we can expect a weak recovery in the economy as well.
The stock market would not be the only predictor of a weak economic recovery. Many observers have pointed out that the excessive levels of capital investment in the last few years as well as the high levels of corporate and personal debt in the US preclude a robust recovery in demand, especially in the capital goods that the Singapore manufacturing sector tends to provide. Also, the lack of progress in economic restructuring in Asia, especially Japan, means that Asian countries cannot generate enough demand to provide an alternative engine for economic growth to the US economy.
Some commentators, notably Daniel Lian of Morgan Stanley Dean Witter, have suggested that the Singapore economy generate its own demand by encouraging consumption. In his 29 October 2001 article in the Global Economic Forum, Lian recommended that the Singapore government "abandon the excessively high saving regime in favor of a growing private consumption and services sector led by local enterprises rather than by MNCs. We believe the alternative, which advocates balancing MNC and manufactured export growth with the growth of local enterprises and services, will better facilitate adjustment to the seemingly inevitable lower growth path."
However, the Singapore government does not appear to agree. At the Second Asia Statesmen's Forum on 22 December 2001, in Phuket, Thailand, Tharman Shanmugaratnam, the newly appointed Senior Minister of State for Trade and Industry & Education, reiterated the government's commitment to the investment-led growth model. He said that East Asian economies "will be aided by looking outward, and seeking to grow deeper regional and global inter-linkages, rather than a turn inward towards growth based on domestic consumption". He added that "a strategy that focuses on domestic consumer markets instead of competition in global markets will ultimately reduce the pressure to innovate and to continually find new efficiencies. It is not a strategy for sustained productivity growth, which is fundamentally what it takes for superior long run economic growth."
More pertinent to the issue of demand, however, is his suggestion that China may become "the largest new source of potential demand for products and services the world has seen in the last half-century".
His comments, however, do not directly address the points brought up by Lian and other like-minded observers. The latter are suggesting that governments reduce the emphasis on export- and investment-driven growth by removing impediments to domestic consumption. They are not suggesting the curtailment of regional and global linkages, as implied by him.
As for the suggestion that China will become a new source of demand, that will almost certainly be so, especially with her recent entry to the World Trade Organisation. The question is whether China alone can make up for the shortfall in demand from the US that is being expected.
So the Singapore economy has probably hit bottom. But all indications are that recovery from the bottom will be weak.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.