Tuesday, January 17, 2012

Boom, bust or a slow burn?

Nov 1, 2011


Slower growth could be tougher to manage than a short, sharp recession

By Robin Chan

HERE'S something to ponder: Could a bout of slow growth possibly be more painful than the boom and bust of a severe recession?

That question has arisen as the Singapore economy faces a period of slowing growth. The Monetary Authority of Singapore last week said the economy would likely 'stall' for several quarters before picking up late next year.

It predicted that next year, Singapore would grow below its potential rate of 3 per cent to 5 per cent. If so, this would be the third time in five years Singapore fails to hit its growth potential of 3 per cent to 5 per cent.

A slowdown from 5 per cent to less than 3 per cent is nothing like the sharp, deep contraction in 2009. That was when the economy was slated to shrink by more than 6 per cent in the first half of the year, but eventually fell just 0.8 per cent for the full year.

While some economists would argue that a gradual slowdown is less painful than a recession, others like economist Irvin Seah from DBS Bank say it is like choosing between a heart attack and a slow death.

They warn that this round of slower growth may prove as painful as the previous recession for two reasons. First, the effects will be felt across the board as fewer jobs are created, unemployment creeps up, and inflation persists.

Second, it will last a whole lot longer. As Prime Minister Lee Hsien Loong put it starkly over the weekend, Singapore is past its 'adolescent' phase of shooting up 5 per cent to 7 per cent each year. In this different mature phase, hitting 3 per cent to 4 per cent is 'not bad'.

Like it or not, a new era of slow growth is now upon Singapore. Economists warn that the effect of this will be longer and more widespread than the short, sharp recession of 2009 when job growth plunged and unemployment rose.

This time, while the local economy is not quite flatlining, the anaemic growth next year could see unemployment creep up from the 2 per cent rate at the year end, to hover around 2.3 per cent for a while, said CIMB economist Song Seng Wun.

Mr Song has slashed his job creation forecast next year by 20,000 jobs to between 60,000 and 65,000 new jobs. This is compared with an estimated 95,000 new jobs that will be created this year.

With slower growth and an easing jobs market, wage growth will also cool, which will affect many workers.

Another painful side effect for Singaporeans: Inflation may be trickier to beat in a slowdown compared with a recession.

In 2009, the global recession saw record high inflation finally come off, as companies reduced production sharply and consumers cut back on spending, causing prices to fall quickly. Inflation fell from 6.6 per cent in 2008 to 0.6 per cent in 2009.

But slow growth can ironically sustain inflationary pressures. Companies continue to produce and households continue to consume, keeping up demand and hence prices, even though growth is already slowing.

Bank of America-Merrill Lynch's Dr Chua Hak Bin has forecast inflation to average 5.2 per cent this year and 3.9 per cent next year, above the long-term average inflation rate of about 2 per cent.

An inflation rate that refuses to go down when growth slows makes it more challenging for Singapore's central bankers to manage monetary policy as they have to watch both inflation and growth.

This was demonstrated by the Monetary Authority of Singapore's recent decision to keep the Singdollar on an appreciation path, albeit a more gradual one. A strong Singapore dollar makes imports cheaper and helps bring down price levels. But it also makes exports more expensive and less competitive, hurting firms and hence growth.

If wage growth is slow and prices take a long time to fall, the purchasing power of Singaporeans may also be eroded.

Is there a way out of the slow growth conundrum? Unfortunately, economists say that looking ahead, there will be no 'easy growth' for Singapore.

There appears to be no spark, as there was in 2009 with the opening of the two integrated resorts, to jumpstart the economy. Those contributed more than half of the $7.9 billion in value-added to the economy last year from tourism. A shift in policy to tighten the tap on foreign workers may also constrain growth.

Nor can Singapore rely on the electronics upcycle, which last year fuelled an exceptional boom in manufacturing. The electronics upswing has run its course and the sector is contracting.

The drugs sector which expanded early last year, is also notoriously volatile.

Trade-dependent Singapore is not getting much of a helping hand from the major economies either. The green shoots of recovery from the global recession never really blossomed into anything sustainable, and the major economies are slowing down, including China.

Growth going forward will therefore be more difficult and will have to come from productivity enhancements, supported by government initiatives to retrain workers and subsidise technology investments, say economists.

And while there will be continued investments in promising sectors such as clean energy and aerospace, these will take time to realise their full potential.

In such an environment, policymakers have to make sure that a period of slow growth does not translate to the country just 'muddling through' - accepting slow growth as the inevitable reality of a maturing economy and the current global uncertainty, and not taking active steps to boost the economy and the living standards of Singaporeans in the long run.

As PM Lee said on Sunday: 'When you're an adolescent, you grow and shoot up inches every year; but when you're mature, you hope to grow, not necessarily taller, but wiser and better. We have to make that change of gear.'

Singapore not only needs to work harder to sustain a slowing rate of growth. It will also have to ensure that growth is of good quality - broad-based, and helping workers move up the value chain.

In short, slow growth may not sound quite as daunting as a recession for now.

But in the medium term, the challenges - and the adjustment and pain of change - will be no less difficult.


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