Analysts find GIC's views on recession too gloomy

April 23, 2008

Analysts find GIC's views on recession too gloomy

By Bryan Lee

THESE are turbulent times, but the world economy has seen worse in the past 30 years, according to economists who feel the Government of Singapore Investment Corporation's (GIC's) gloomy outlook is too bearish.

GIC deputy chairman Tony Tan said on Monday that the world could be facing its worst recession in three decades, if policymakers do not act soon to stem a global credit crisis.

He called for swift action to stabilise the United States housing market, which is at the heart of the problem. If left just to market forces, the recovery would be 'considerably more painful and long- drawn', he added.

Asian Development Bank managing director- general Rajat Nag disagrees with this prognosis.

'It's too pessimistic. We have to assume that things will get much worse in the US, Japan and elsewhere for this to happen,' he told reporters at a breakfast meeting. 'We are expecting an upturn in the US in the second half, when fiscal recovery measures kick in.'

UBS economist Paul Donovan said the downturn is certainly serious, as it is happening across the globe, but the recession in the early 1980s was far more severe, with US unemployment hitting a post-war high of 10.8 per cent in December 1982.

'I think 30 years is putting it a bit strongly. 1981 was very bad indeed, and that was synchronised... We are currently not like that,' he said.

Mr Donovan added that for individual economies, the downturns in the 1990s were worse. The US and Britain had tougher times in 1991, Europe in 1995 and Japan in the mid-1990s.

But he added that 'it is fair to say that this is a worse economic downturn than 2001'.

Analysts noted that despite the turmoil in the global banking sector, real economic activity has not been that badly hurt so far.

'The superlatives of 'the worst' and all that are more appropriate for the problems faced by financial markets,' said Action Economics economist David Cohen.

He pointed out that the recent International Monetary Fund forecast for world growth in gross domestic product of 3.7 per cent is about the average rate for the past 25 years.

'It doesn't sound like the worst disaster in three decades.'

As for the need for policy action, Mr Donovan said intervention is warranted, given the failure of several financial markets.

He hopes that the US government, on top of more rate cuts, will move to stabilise the financial sector so that it can 'get on with the process of repairing itself'.

A plan to bail out sub-prime home owners and their lenders, which is now being debated, could be helpful, he said.

Mr Cohen said the US Federal Reserve has already taken an unprecedented action by extending its role as 'lender of last resort' to investment banks.

He said it would be better to hold off more extreme measures until there is evidence that the downturn is getting more serious, given the uncertainty about the impact of financial sector problems on the overall economy.

bryanlee@sph.com.sg

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