Growth forecast too high?

August 8, 2008
Growth forecast too high?
Poor consumer demand may stall second half rebound; all signs point
to slower pace of 3-5%
By Ignatius Low, Money Editor

IS THE official growth forecast of 4 to 6 per cent for the Singapore
economy too high?

Could we instead be heading for a much lower clip, like (gasp) 3 per
cent?

Three months ago, most people would have said no. With first-quarter
gross domestic product (GDP) growth of 6.7 per cent in the bag, the
sub-prime crisis seeming to clear up and a rebound in manufacturing
expected in the second half of this year, the full-year forecast
seemed eminently achievable.

Now, a much gloomier picture is emerging. Most private sector
economists have lowered their forecasts to 4-plus per cent.

Standard Chartered Bank is even predicting 3.5 per cent, echoing some
of the sentiments of its more bearish peers in the financial sector.

If these people are right, then the Government is being overly
optimistic about growth. This is uncharacteristic of our cautious
economic planners, who are more famous for low-balling forecasts and
delivering better-than-expected results.

Let us look at the figures.

Following 6.7 per cent in the first quarter, second-quarter growth
was estimated to be an alarmingly anaemic 1.9 per cent.

For full-year growth to be 5 per cent, the economy will now need to
stage a decisive rebound and grow 5.7 per cent in each of the
remaining quarters.

To hit 4 per cent, the remaining quarters must clock 3.7 per cent.
And to hit 3 per cent, the figure is 1.7 per cent.

Is growth in the third and fourth quarters going to be more like 5.7
per cent or 1.7 per cent?

Given the speed at which sentiment has soured in the past few weeks,
the latter scenario is not unthinkable.

A recent poll of business sentiment showed that many companies in
Singapore do not expect conditions to improve in the next six months.

Optimists will however argue that second-quarter GDP numbers were
artificially depressed by very low production in a number of key
pharmaceuticals plants.

Pharmaceuticals now accounts for almost a quarter of the
manufacturing sector in Singapore by value added, and manufacturing
in turn is one-quarter of the economy.

Production numbers in that sector are famously unpredictable because
they do not really correspond to global business cycles.

Plants may produce 'intermediates' which are not logged as output and
shut down for a couple of months when switching from one drug to
another.

The second-quarter's 1.9 per cent growth should thus be seen as
something of a blip. It is like 'hitting an air pocket' in mid-
flight, one economist said to me recently.

Still, economists are not sanguine about the outlook, even if the
pharmaceuticals problem rights itself in the months to come.

The trouble is that the second-half rebound so widely anticipated is
predicated on two things: a demand-led recovery in manufacturing and
continued robust growth in domestic sectors like services and
construction.

And both of these engines could sputter in the second half.

In the United States, consumer confidence is plummeting with rising
inflation, and falling home prices are fuelling more borrower
defaults.

The US Federal Reserve is publicly acknowledging the fragility of the
US economy. In Europe, demand for exports is also slowing.

If consumer demand in both these economic giants drops sharply in the
coming months, Singapore's manufacturing sector will be hit hard.
Already, the Republic's exports growth forecast has been downgraded.

And in China? Some now foresee a post-Olympics slump.

The Chinese government has signalled a shift away from tightening
monetary policy to battle inflation to a more accommodative stance,
holding off on raising rates as a defensive measure against slowing
growth.

In Singapore, the Formula One race next month and the building of
mega-projects like the Integrated Resorts are supposed to keep
domestic sectors like services and construction buoyant.

But rising materials costs and a slowing property sector are putting
the brakes on construction, with many projects either being postponed
or scaled back.

Financial and business services are doing okay but they are
externally-oriented, so activity could slow very quickly in tandem if
global growth falters.

There are even question marks over the impact of the F1 races, with
many hotels in Singapore not full and reports of spectators taking
their business to hotels across the Causeway.

This is not counting a possible slowdown in travel and tourist
arrivals, which I fear could come sooner than expected.

With all this uncertainty, economists are not about to put good money
on even their recently-revised forecasts.

One economist told me privately that she is all ready to downgrade
her 2008 forecast again (and yes, to about 3 per cent) should a fresh
crisis from the sub-prime debacle erupt.

And yesterday, Finance Minister Tharman Shanmugaratnam gave the
clearest indication yet that the Government is well aware of the
changing situation.

He thinks the global economy will remain weak well into next year and
we are unlikely to see a rebound in growth anytime soon.

Given the circumstances, I would expect the Government to lower its
forecast - to a defensive range of 3 per cent to 5 per cent.

It will mean quite an adjustment for most of us, coming after four
great years in which GDP growth averaged 8 per cent annually.

But these are realistic numbers for what are shaping up to be notably
sober times.