Singapore's Painless Recovery?

I paraphrased an article printed on-line in the Straits Times on 15th May 2009. I think it is an interesting article.

When the government cried fire, there seems not to be smoke anywhere for its citizens. What gives?

The government's official stand-Singapore is in the midst of a severe recession,the worst ever.

Exports collapsed in the first three months of the year by almost 30 per cent, dragging down first-quarter growth by a record negative 20 per cent over the previous quarter.

The Government then downgraded its full-year growth forecast to negative 6 per cent to negative 9 per cent, while the International Monetary Fund (IMF) forecasted a negative 10 per cent, making Singapore the worst performing country in Asia this year.

But there is another set of facts that presents quite a different picture.

These facts may be less scientific, but they are nevertheless real.

However, on the ground, the picutre do not seems to reflect the so-called economic woes!

Sales of new private homes in Singapore have jumped back to near pre-crisis levels, and there is evidence that property prices are stabilising and even inching up. Car sales dipped for a while, but then found a firmer footing. Crowds have been turning up in record numbers at travel and computer fairs.

Retail sales did drop by 15 per cent in January, but this was still better than the 20 per cent plunge during the 1997-1998 Asian financial crisis. Most restaurants in town remain packed at weekends, while the lines at nightclubs such as Butter Factory and Zouk still stretch round the block.

This disconnect — between what the statistics indicate is a gut-wrenching recession and the actual less-than-disastrous state of the real economy — has got economists debating the true impact of this “worst-ever” recession.

Yes, some businesses have been driven to closure, thousands of people have lost their jobs and almost everyone is feeling some pain. But there is a clear “disjuncture” between “what are truly horrible numbers” for economic growth, exports and industrial production, and the impact this is having on “ordinary folk as they go about their ordinary lives”, Manu Bhaskaran of the Centennial Group observed at an IMF event last week.

So why is the picture on the ground so different from that painted by the statistics? Economists have proffered a number of reasons.

One is that Singapore is entering this unprecedented recession from an equally unprecedented position of strength. “A lot of Singapore’s resilience is due to the seven ‘fat’ years we had from 2001 to 2007, where economic growth averaged 5.5 per cent a year, even with the SARS period in 2003,” said OCBC economist Selena Ling.

In particular, the past two years saw supercharged growth, boosting Singapore workers’ average monthly earnings by 5.8 per cent a year.

This explains why “apart from the relatively small proportion of unemployed, the rest of the Singapore population is still in a position to shop, dine out and bargain hunt for assets”.

During the 1997-1998 crisis, the GDP per capita was S$35,115 (RM84,997). By last year, it had jumped to S$53,192. In 2006 and 2007, Singapore was among the countries with the fastest growing number of millionaires.

Companies also raked in record takings, building a large buffer of savings that muted the blows of the financial crisis, said Citi economist Kit Wei Zheng.

All this means fewer than expected people and firms are actually going broke.

Bankruptcy levels last year were half those in 2003 and 2004, while the number of companies liquidated last year was a third of that in 1999, according to Ling.

Then there is the buffer that foreign workers and expatriates provide.

Their number, by some estimates, has risen by 70 per cent since 2000. Jobs held by foreigners have been cut first in this recession in favour of saving Singaporean ones, especially because programmes such as the Jobs Credit Scheme protect only local workers

Time magazine, which featured Singapore’s surprising resilience in an article on April 28, also gave credit to the Government’s social safety net.

Part of the answer also lies in the “dualist” nature of Singapore’s economy, said Bhaskaran. He estimates that half the economy is foreign in terms of ownership and employment, including manufacturing and finance - the hardest-hit sectors in this recession.

Foreign companies have suffered losses. But while there has been some spillover to local industries, this has been more contained, Bhaskaran said.

Economic resilience aside, the dismal statistics themselves could have been exaggerated. Companies pre-emptively slashed production to preserve their balance sheets and conserve cash. This implied a vanishing of demand that did not quite materialise.

In all, there are “certainly more shock absorbers” now compared with the “shock amplifiers” in the last recession, when companies’ balance sheets were weaker and policy regimes were more “inflexible”, Bhaskaran said.

Whatever is the explanation, markets might do well not to overreact to the apparent contradiction between statistics and experience. Already, talk of “green shoots” has boosted sentiment so much that Citi’s Kit upgraded his growth forecast for Singapore this week.

If it is true that the recovery is on the way, Singapore’s worst-ever recession could turn out to be among its most painless.

But there is another, more worrying possibility: That the real economy could be just lagging behind the numbers, said CIMB-GK’s Song Seng Wun.

“Green shoots” may be emerging statistically, but the pain implied by the earlier figures may not have fully hit yet, thanks in part to the Government’s cushions. If external demand fails to pick up, for instance, further agony could be around the corner as the job market traditionally lags the economic numbers by a few quarters.

In other words, it may not feel like negative 10 per cent now, but it will soon.

Anyone betting on this?