It is followed by at least 2 quarters of change in the same direction: economist
By ANNA TEO 16 February 2009
(SINGAPORE) Seeing as how growth forecasts - in Singapore and elsewhere - were progressively pared through last year, the million-dollar question surely is not how much the economy will contract this year but when it will start turning around.
While market estimates of Singapore’s GDP fortunes in 2009 have taken the cue from official forecasts of a 2-5 per cent contraction, it will be no surprise if each new set of quarterly data in the months ahead leads to fresh adjustments - with luck, to the upside.
For now, that is not quite on the cards: Credit Suisse, for instance, recently slashed its 2009 GDP forecast for Singapore to a 5 per cent contraction, and says that the risks are stacked squarely on the downside.
With each week bringing fresh news of big corporate layoffs and no firm signs of the decline bottoming out in key sectors, the recession clearly has not run its course. But it is apparent enough too - to the Ministry of Trade and Industry (MTI) and to most economists - that it is Singapore’s sharpest and deepest downturn to date, and likely the most protracted as well.
For the record, Singapore’s previous downturns have seen, for example, four negative quarters on an adjusted, sequential basis in 1997-98, and four negative year-on-year quarters in 2001-02.
This time, the economy has posted three negative quarters in sequential terms, with Q4 2008’s near-17 per cent slump being the sharpest on record. The current Q1 is also expected to remain in the red.
In year-on-year terms, GDP sank in the second half of 2008, and will likely stay in negative territory for at least another quarter or two.
But these ‘growth’ rates do not offer the best clues to the economy’s turning points: As MTI second permanent secretary Ravi Menon said at a media briefing last month, the way to look at recessions is from peak to trough of the business cycle.
‘And in that regard, this is already shaping up as, by many accounts, the deepest recession,’ he said.
A 2004 study by Singapore’s Department of Statistics identified six growth cycles for the Singapore economy since the 1985 recession, with absolute declines in economic activity - or what’s called a classical recession - in two of the cycles: the Asian financial crisis in 1997-98 and the 2001 downturn.
The study used not only real GDP but a clutch of coincidental and leading indicators to identify the peaks and troughs - and hence the duration - of each growth cycle.
In the earlier cycles, the slump phase (from peak to trough) ranged from seven months (September 1994 to April 1995) to 26 months (August 1990 to October 1992), while upturns lasted as long as 30 months (December 1985 to June 1988).
The current cycle has surpassed the previous records - at least in the boom phase. Until recently, the economy had been on an upturn since April 2003 - the latest trough identified in the 2004 study, marking the end of a year- long cyclical slowdown.
And going by the seasonally adjusted, real GDP values - a close proxy in lieu of more precise monthly indicators - the economy reached a peak, and started to turn down, in Q1 2008.
So that’s a boom phase of almost five years, from April 2003 to Q1 2008.
The question now is whether the trough, marking the next economic turnaround, will occur in the current or next quarter, or later. A turning point can be confirmed if it is followed by at least two quarters of change in the same direction, says economist Chow Kit Boey, who specialises in growth cycles.
In a recent study, HSBC economist Robert Prior-Wandesforde found seven (from a list of 25 global and regional) economic indicators that provide a good lead of Asian growth. The lead indicators are mostly US and German measures, notably the slope of the US yield curve, while two China measures and the US Standard & Poor’s equity market index were found to be good coincident indicators.
‘Things look very bad for the short term (worse than 1998) but the good news is that the longer lead indicators are providing some light at the end of what is clearly a very dark tunnel,’ says Mr. Wandesforde.
There remains a chance of an Asian economic recovery in the second half of this year, he adds. ‘The risk is that the downturn proves even sharper than we expected, but we wouldn’t rule out the upturn being more pronounced as well.’
Meanwhile, a recent McKinsey study of the financial performance of US companies during the four most recent US recessions also lists some ‘possible’ indicators of the start of a rebound: Higher consumer spending, higher IT spending, and when growth resumes in earnings before interest, tax and amortisation (Ebita).
Total returns to shareholders (TRS) also generally stops declining near the end of a recession, so resumed growth in broad stock market indices might also herald a turnaround, the McKinsey paper says.
Unprecedented as the current recession is widely said to be, the study found that it does follow many patterns of past downturns. Notably, all four recent US recessions - in the mid-1970s, early 1980s, early 1990s and 2001 - started with falling sales and Ebita in the consumer sector, and three with IT declines as well.
And while wrong assumptions about the pace, scale and timing of growth may slow progress in good times, in the current bad times, misjudgement ‘could be fatal’, the paper says.
In any case, in a sign that things may just be starting to bottom out, a recent McKinsey Quarterly poll of executives around the world found them to be slightly less bearish about their economies than a month or two ago.
The executives still view economic prospects quite dimly, to be sure, but - ‘in a change from recent months’, McKinsey notes - do not see them getting much worse.
The poll of some 1,820 executives was conducted in the week from Jan 27 ‘during another round of significant lay-offs and falling stock prices’. McKinsey reckons that the US executives, particularly, perhaps believe that the economy ‘has hit bottom and that even tens of thousands of lay-offs and continued steep losses in shareholder value aren’t worsening the situation’.
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Looking for clues to the turnaround
It is followed by at least 2 quarters of change in the same direction: economist
By ANNA TEO
16 February 2009
(SINGAPORE) Seeing as how growth forecasts - in Singapore and elsewhere - were progressively pared through last year, the million-dollar question surely is not how much the economy will contract this year but when it will start turning around.
While market estimates of Singapore’s GDP fortunes in 2009 have taken the cue from official forecasts of a 2-5 per cent contraction, it will be no surprise if each new set of quarterly data in the months ahead leads to fresh adjustments - with luck, to the upside.
For now, that is not quite on the cards: Credit Suisse, for instance, recently slashed its 2009 GDP forecast for Singapore to a 5 per cent contraction, and says that the risks are stacked squarely on the downside.
With each week bringing fresh news of big corporate layoffs and no firm signs of the decline bottoming out in key sectors, the recession clearly has not run its course. But it is apparent enough too - to the Ministry of Trade and Industry (MTI) and to most economists - that it is Singapore’s sharpest and deepest downturn to date, and likely the most protracted as well.
For the record, Singapore’s previous downturns have seen, for example, four negative quarters on an adjusted, sequential basis in 1997-98, and four negative year-on-year quarters in 2001-02.
This time, the economy has posted three negative quarters in sequential terms, with Q4 2008’s near-17 per cent slump being the sharpest on record. The current Q1 is also expected to remain in the red.
In year-on-year terms, GDP sank in the second half of 2008, and will likely stay in negative territory for at least another quarter or two.
But these ‘growth’ rates do not offer the best clues to the economy’s turning points: As MTI second permanent secretary Ravi Menon said at a media briefing last month, the way to look at recessions is from peak to trough of the business cycle.
‘And in that regard, this is already shaping up as, by many accounts, the deepest recession,’ he said.
A 2004 study by Singapore’s Department of Statistics identified six growth cycles for the Singapore economy since the 1985 recession, with absolute declines in economic activity - or what’s called a classical recession - in two of the cycles: the Asian financial crisis in 1997-98 and the 2001 downturn.
The study used not only real GDP but a clutch of coincidental and leading indicators to identify the peaks and troughs - and hence the duration - of each growth cycle.
In the earlier cycles, the slump phase (from peak to trough) ranged from seven months (September 1994 to April 1995) to 26 months (August 1990 to October 1992), while upturns lasted as long as 30 months (December 1985 to June 1988).
The current cycle has surpassed the previous records - at least in the boom phase. Until recently, the economy had been on an upturn since April 2003 - the latest trough identified in the 2004 study, marking the end of a year- long cyclical slowdown.
And going by the seasonally adjusted, real GDP values - a close proxy in lieu of more precise monthly indicators - the economy reached a peak, and started to turn down, in Q1 2008.
So that’s a boom phase of almost five years, from April 2003 to Q1 2008.
The question now is whether the trough, marking the next economic turnaround, will occur in the current or next quarter, or later. A turning point can be confirmed if it is followed by at least two quarters of change in the same direction, says economist Chow Kit Boey, who specialises in growth cycles.
In a recent study, HSBC economist Robert Prior-Wandesforde found seven (from a list of 25 global and regional) economic indicators that provide a good lead of Asian growth. The lead indicators are mostly US and German measures, notably the slope of the US yield curve, while two China measures and the US Standard & Poor’s equity market index were found to be good coincident indicators.
‘Things look very bad for the short term (worse than 1998) but the good news is that the longer lead indicators are providing some light at the end of what is clearly a very dark tunnel,’ says Mr. Wandesforde.
There remains a chance of an Asian economic recovery in the second half of this year, he adds. ‘The risk is that the downturn proves even sharper than we expected, but we wouldn’t rule out the upturn being more pronounced as well.’
Meanwhile, a recent McKinsey study of the financial performance of US companies during the four most recent US recessions also lists some ‘possible’ indicators of the start of a rebound: Higher consumer spending, higher IT spending, and when growth resumes in earnings before interest, tax and amortisation (Ebita).
Total returns to shareholders (TRS) also generally stops declining near the end of a recession, so resumed growth in broad stock market indices might also herald a turnaround, the McKinsey paper says.
Unprecedented as the current recession is widely said to be, the study found that it does follow many patterns of past downturns. Notably, all four recent US recessions - in the mid-1970s, early 1980s, early 1990s and 2001 - started with falling sales and Ebita in the consumer sector, and three with IT declines as well.
And while wrong assumptions about the pace, scale and timing of growth may slow progress in good times, in the current bad times, misjudgement ‘could be fatal’, the paper says.
In any case, in a sign that things may just be starting to bottom out, a recent McKinsey Quarterly poll of executives around the world found them to be slightly less bearish about their economies than a month or two ago.
The executives still view economic prospects quite dimly, to be sure, but - ‘in a change from recent months’, McKinsey notes - do not see them getting much worse.
The poll of some 1,820 executives was conducted in the week from Jan 27 ‘during another round of significant lay-offs and falling stock prices’. McKinsey reckons that the US executives, particularly, perhaps believe that the economy ‘has hit bottom and that even tens of thousands of lay-offs and continued steep losses in shareholder value aren’t worsening the situation’.
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