Singapore
Singapore: Riding the Global Tide and Macro Rebalancing Singapore-Style
April 29, 2010
By Deyi Tan, Chetan Ahya & Shweta Singh l Singapore|
Raising Our 2010 and 2011 GDP Outlook
The 13.1%Y 1Q10 advance GDP estimates released by MTI in early April were significantly stronger than what was embedded within our model, setting the macro trajectory at a higher entry point heading into 2Q10. Beyond the low base effect, sequential momentum, at 32.1%Q saar, has also been robust. The better-than-expected number was a result of global trade and asset market linkages, both of which had rebounded sharply courtesy of the global policy stimulus. Indeed, the actual March data recently released show IP averaging at 32.9%Y in 1Q10, higher than the 30.0%Y embedded in the advance estimate and posing further upside risks to headline GDP, all else equal. Unlike in the early phase of the recovery where momentum has been largely driven by the volatile biomed production, the recovery has now broadened out to the electronics segment as well. Similarly, services sectors such as financials have also done well, given the asset market rally and the beginning of a new credit cycle.
While the macro recovery was externally led in terms of its origin, these external linkages have inadvertently spilled over to domestic demand. For starters, the relatively low level of job losses throughout the global recession has not hampered the unemployment rate from falling further, down to 2.1% in 4Q09, with implications for consumer spending. To be sure, part of this improvement is due to one-off factors such as the opening timing of the integrated resorts. Yet, the impact of cyclical recovery in external demand could be seen from the pick-up in manufacturing headcount. Also, with GDP returning to pre-crisis peak levels, capex expansion has since resumed in 4Q09 in the cyclical machinery and equipment segment. As a result, we are raising our GDP forecast to 9% in 2010 and to 6% in 2011, from 5% for both years. A 9% growth forecast would make this the strongest recovery following a contraction year compared to past cycles, taking growth back to the kind of levels we saw during the boom years of 2004-07.
Much of the Annual Growth Is in the Bag...
The strong 1Q10 GDP numbers imply that a significant portion of the annual growth is already in the bag. As a rough benchmark, given the 1Q10 numbers, even if sequential growth were to stay at 0%Q on a seasonally adjusted basis for 2Q-4Q10, headline GDP growth would still come to 8.6%Y by our calculations.
The current run-rate looks very strong but quarterly GDP profile and the normalized growth trend are more important to gauge. A global double-dip recession is not our base case and we believe that the global macro fundamentals are on the mend. Yet, we think that the ~13%Y run-rate expected in 1Q10 has been augmented by one-off factors such as easy comparisons and the restocking surge. Hence, it is unlikely to be sustainable or repeated in coming quarters. Given the base effects, we believe that 1Q10 likely marked the peak in the quarterly percentage year-on-year growth trajectory for 2010 and 2011. Having said that, we expect the oncoming headline deceleration to be moderate as leading indicators such as the US ISM New Orders Index have not rolled off in a significant way; the US inventory-to-sales ratio still looks low, and global policy stimulus is unlikely to be pulled out abruptly. We think that the economy is likely to moderate to a still healthy pace of 6% or so by 4Q10.
Deflation Concerns Behind Us; Should We Now Be Worried About Inflation?
Although the economy plunged 9.5% from peak to trough during the global recession, the sharp recovery since and the overheating days in the last boom have prompted some to question whether inflationary risks are imminent. On a global basis, inflation pressures look set to accelerate at a much earlier stage of the current recovery cycle as compared to the last boom cycle when ‘Goldilocks' prevailed initially. In Singapore, inflation had averaged a subdued 0%Y in 1999 (versus -0.3% in 1998) and +0.5%Y in 2003 (versus -0.4%Y in 2002), the first year the economy managed to emerge from deflation. Yet this time round, inflation is likely to come round to our forecast of 2%Y in 2010 and 2011, from 0.6%Y in 2009.
The difference between this recovery cycle and the past has been the strength of the rebound in asset markets and commodity prices. To the extent to which global policymakers overstay their presence in order to prevent a double-dip recession, we think that inflation risks for Singapore are skewed to the upside. Yet, we believe that Singapore policymakers still have some time buffer on their side before demand-pull pressures coalesce with the cost-push pressures to give rise to overheating concerns.
For one, much in contrast to its modus operandi in 2007 and 2008, the MAS now seems determined not to fall behind the curve. The aggressive move of re-centering upwards the midpoint of the bandwidth as well as moving from a zero appreciation to a gradual appreciation slope will help circumvent import-led inflation, particularly in commodity prices. Some wonder if the quicker appreciation may be counter-productive as it attracts more capital inflows in expectation of further currency appreciation, hence injecting more liquidity into the system and fueling inflation. In our view, the more-aggressive-than-expected move may in fact be more effective in containing excessive inflows as it eases a further build-up of appreciation expectations with a big move right from the start.
Separately, unlike past downturns when capex recessions tend to persist for much longer, capex levels (such as in real estate and machinery & equipment) have now gone back to pre-crisis peaks. Indeed, recall that supply-side expansion has been ongoing throughout the global recession, particularly on the real estate front, which means that there is slack to tap into. In our view, the key factor which will turn inflationary risk into a real threat is if the economy persistently grows above its potential growth of 5-6% beyond 2010.
What Are the Longer-Term Issues?
Aggressive policy stimulus has averted a prolonged global recession and enabled the high-beta economy to concomitantly ride the global tide in the upswing. Yet, cyclical rebound notwithstanding, longer-term macro rebalancing remains pertinent. Rather than slowing down, policymakers affirm that the macro rebalancing in Singapore has gained greater urgency. As highlighted in previous research (see ASEAN MacroScope: Macro-Rebalancing Singapore-Style, July 30, 2009), the small domestic demand base means that Singapore's rebalancing strategy is unlikely to conform to the strictest sense of the term - i.e., rebalancing from exports to domestic demand. Instead, an alternative variant of the export model where the rebalancing takes place in terms of the export sectors (from cyclical to secular), the end buyers (from consumers to corporates and governments) and the end destinations (from developed world to Asia) would be the strategy.
Indeed, policymakers intend to capitalize on the three secular trends of urbanization, ageing and growing affluence, which would be manifesting most prominently in Asia. While Singapore may not yet have the solutions or products catering to such emerging trends in the region, the idea is to provide a platform in Singapore to bring together the public, quasi-public and private sectors to test-bed and co-develop relevant products, which is hopefully then scalable and exportable to global markets. While the strategy is laid out, issues still remain - policymakers need to develop the unique selling-point which would entice corporates to come to Singapore rather than to test-bed ideas elsewhere in Asia. Moreover, after the test-bedding phase, the difficulty also lies in identifying the part of the production value-chain which Singapore can fit in and profit from. Just as some of these mega trends are emerging, relevant industries in Singapore are also in the infant stages and where expertise is absent; it would have to be developed for the value to be milked.
What Are the Risks to Our Outlook?
Upside and downside risks to the near-term outlook are entirely global in nature. Downside risks stem from a global double-dip recession arising from premature policy exit. Upside risks come from global policymakers overstaying their presence. Such upside growth risks would correspondingly increase the risk of inflationary pressures progressively building up in Singapore.
Singapore: Riding the Global Tide and Macro Rebalancing Singapore-Style
April 29, 2010
By Deyi Tan, Chetan Ahya & Shweta Singh l Singapore|
Raising Our 2010 and 2011 GDP Outlook
The 13.1%Y 1Q10 advance GDP estimates released by MTI in early April were significantly stronger than what was embedded within our model, setting the macro trajectory at a higher entry point heading into 2Q10. Beyond the low base effect, sequential momentum, at 32.1%Q saar, has also been robust. The better-than-expected number was a result of global trade and asset market linkages, both of which had rebounded sharply courtesy of the global policy stimulus. Indeed, the actual March data recently released show IP averaging at 32.9%Y in 1Q10, higher than the 30.0%Y embedded in the advance estimate and posing further upside risks to headline GDP, all else equal. Unlike in the early phase of the recovery where momentum has been largely driven by the volatile biomed production, the recovery has now broadened out to the electronics segment as well. Similarly, services sectors such as financials have also done well, given the asset market rally and the beginning of a new credit cycle.
While the macro recovery was externally led in terms of its origin, these external linkages have inadvertently spilled over to domestic demand. For starters, the relatively low level of job losses throughout the global recession has not hampered the unemployment rate from falling further, down to 2.1% in 4Q09, with implications for consumer spending. To be sure, part of this improvement is due to one-off factors such as the opening timing of the integrated resorts. Yet, the impact of cyclical recovery in external demand could be seen from the pick-up in manufacturing headcount. Also, with GDP returning to pre-crisis peak levels, capex expansion has since resumed in 4Q09 in the cyclical machinery and equipment segment. As a result, we are raising our GDP forecast to 9% in 2010 and to 6% in 2011, from 5% for both years. A 9% growth forecast would make this the strongest recovery following a contraction year compared to past cycles, taking growth back to the kind of levels we saw during the boom years of 2004-07.
Much of the Annual Growth Is in the Bag...
The strong 1Q10 GDP numbers imply that a significant portion of the annual growth is already in the bag. As a rough benchmark, given the 1Q10 numbers, even if sequential growth were to stay at 0%Q on a seasonally adjusted basis for 2Q-4Q10, headline GDP growth would still come to 8.6%Y by our calculations.
The current run-rate looks very strong but quarterly GDP profile and the normalized growth trend are more important to gauge. A global double-dip recession is not our base case and we believe that the global macro fundamentals are on the mend. Yet, we think that the ~13%Y run-rate expected in 1Q10 has been augmented by one-off factors such as easy comparisons and the restocking surge. Hence, it is unlikely to be sustainable or repeated in coming quarters. Given the base effects, we believe that 1Q10 likely marked the peak in the quarterly percentage year-on-year growth trajectory for 2010 and 2011. Having said that, we expect the oncoming headline deceleration to be moderate as leading indicators such as the US ISM New Orders Index have not rolled off in a significant way; the US inventory-to-sales ratio still looks low, and global policy stimulus is unlikely to be pulled out abruptly. We think that the economy is likely to moderate to a still healthy pace of 6% or so by 4Q10.
Deflation Concerns Behind Us; Should We Now Be Worried About Inflation?
Although the economy plunged 9.5% from peak to trough during the global recession, the sharp recovery since and the overheating days in the last boom have prompted some to question whether inflationary risks are imminent. On a global basis, inflation pressures look set to accelerate at a much earlier stage of the current recovery cycle as compared to the last boom cycle when ‘Goldilocks' prevailed initially. In Singapore, inflation had averaged a subdued 0%Y in 1999 (versus -0.3% in 1998) and +0.5%Y in 2003 (versus -0.4%Y in 2002), the first year the economy managed to emerge from deflation. Yet this time round, inflation is likely to come round to our forecast of 2%Y in 2010 and 2011, from 0.6%Y in 2009.
The difference between this recovery cycle and the past has been the strength of the rebound in asset markets and commodity prices. To the extent to which global policymakers overstay their presence in order to prevent a double-dip recession, we think that inflation risks for Singapore are skewed to the upside. Yet, we believe that Singapore policymakers still have some time buffer on their side before demand-pull pressures coalesce with the cost-push pressures to give rise to overheating concerns.
For one, much in contrast to its modus operandi in 2007 and 2008, the MAS now seems determined not to fall behind the curve. The aggressive move of re-centering upwards the midpoint of the bandwidth as well as moving from a zero appreciation to a gradual appreciation slope will help circumvent import-led inflation, particularly in commodity prices. Some wonder if the quicker appreciation may be counter-productive as it attracts more capital inflows in expectation of further currency appreciation, hence injecting more liquidity into the system and fueling inflation. In our view, the more-aggressive-than-expected move may in fact be more effective in containing excessive inflows as it eases a further build-up of appreciation expectations with a big move right from the start.
Separately, unlike past downturns when capex recessions tend to persist for much longer, capex levels (such as in real estate and machinery & equipment) have now gone back to pre-crisis peaks. Indeed, recall that supply-side expansion has been ongoing throughout the global recession, particularly on the real estate front, which means that there is slack to tap into. In our view, the key factor which will turn inflationary risk into a real threat is if the economy persistently grows above its potential growth of 5-6% beyond 2010.
What Are the Longer-Term Issues?
Aggressive policy stimulus has averted a prolonged global recession and enabled the high-beta economy to concomitantly ride the global tide in the upswing. Yet, cyclical rebound notwithstanding, longer-term macro rebalancing remains pertinent. Rather than slowing down, policymakers affirm that the macro rebalancing in Singapore has gained greater urgency. As highlighted in previous research (see ASEAN MacroScope: Macro-Rebalancing Singapore-Style, July 30, 2009), the small domestic demand base means that Singapore's rebalancing strategy is unlikely to conform to the strictest sense of the term - i.e., rebalancing from exports to domestic demand. Instead, an alternative variant of the export model where the rebalancing takes place in terms of the export sectors (from cyclical to secular), the end buyers (from consumers to corporates and governments) and the end destinations (from developed world to Asia) would be the strategy.
Indeed, policymakers intend to capitalize on the three secular trends of urbanization, ageing and growing affluence, which would be manifesting most prominently in Asia. While Singapore may not yet have the solutions or products catering to such emerging trends in the region, the idea is to provide a platform in Singapore to bring together the public, quasi-public and private sectors to test-bed and co-develop relevant products, which is hopefully then scalable and exportable to global markets. While the strategy is laid out, issues still remain - policymakers need to develop the unique selling-point which would entice corporates to come to Singapore rather than to test-bed ideas elsewhere in Asia. Moreover, after the test-bedding phase, the difficulty also lies in identifying the part of the production value-chain which Singapore can fit in and profit from. Just as some of these mega trends are emerging, relevant industries in Singapore are also in the infant stages and where expertise is absent; it would have to be developed for the value to be milked.
What Are the Risks to Our Outlook?
Upside and downside risks to the near-term outlook are entirely global in nature. Downside risks stem from a global double-dip recession arising from premature policy exit. Upside risks come from global policymakers overstaying their presence. Such upside growth risks would correspondingly increase the risk of inflationary pressures progressively building up in Singapore.