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Editorial: Not to worry too much about Singapore's economy

Published by The Straits Times, Singapore on 2004-10-16

AS someone once famously said at the World Economic Forum in Davos, what truly matters is how economists evaluate a country's economic growth rate - quarter-on-quarter or year-on-year. The year-on-year figure is less distorted because the seasonal adjustment does not remove the highly volatile effect of sectors such as pharmaceuticals and electronics, which contribute formidably to Singapore's gross domestic product of S$165 billion. The month-to-month fluctuations in GDP caused by these sectors - especially pharma - result in the quarter-on-quarter figures becoming so volatile that they do not really give an accurate feel for the current state of the economy. The year-on-year figure typically incorporates the effect of 12 months of data and is thus less volatile - and gives a better representation of how the economy impacts the general living conditions of Singaporeans.

The Davos remark comes particularly to mind because of news this week that Singapore's growth rate for the third quarter "slowed down" to 7.7 percent, from 10 percent in the first six months of 2004. Should that all countries be so fortunate. The growth is still higher than that of virtually any country except China, whose projections are for about 9.6 percent this year. This is not to suggest that Singaporeans might want to be out on the streets dancing with joy, but neither should they be dejected even though gross domestic product contracted some 2.3 percent, ending four straight quarters of double-digit expansion that had soared at one point to 12.5 percent. That kind of expansion was somewhat distorting anyway, coming as it did from a base line of a 1.8 percent growth rate in 2003, the result of Sars and a lingering global recession. The slowdown in this year's third quarter - if indeed slowdown is the right word to employ when it comes to still-stellar growth rates like 7.7 percent - can be attributed largely to a slackening in pharmaceutical output. Construction was down as well, as was growth in the services industry.

Everyday Singaporeans may have understandable concerns: Will there be cutbacks in jobs? Will consumer prices rise as the cost of importing crude oil stays beyond US$52 a barrel? The short answer to such questions is: Relax, don't get too uptight. Why? Because Singapore's economic fundamentals are essentially strong. The infrastructure is sound. Confidence of foreign investors continues undiminished. Perhaps most encouraging of all is the fact that the levers of the economy are in capable hands, ranging from Prime Minister - and Finance Minister - Lee Hsien Loong to the mandarins of the Ministry of Trade and Industry, and of the Monetary Authority of Singapore. They understand fully that a small, open economy like Singapore's can be highly vulnerable to regional and global developments. That is why, for instance, MAS wants a "modest and gradual appreciation" in the value of the Singapore dollar against a basket of other currencies. The policy reflects the MAS's concern over rising inflation - as seen in its recent statement, which seemed to suggest greater concern over rising inflation than with a growth slowdown. So, in effect, the policy statement tells us that in the MAS economists' judgement, while the economy is bound to slow down, the outlook is not at all so worrying. Otherwise they would certainly have eased monetary policy.

All this is not to say, however, that the picture for next year will be rosy. The shock of the oil-price rise has yet to be fully felt by the global economy - and thus by Singapore. Much rides on the outcome of the November 2 presidential election in the United States because the next president - whether incumbent George W. Bush of Texas or his Democratic challenger, Senator John F. Kerry of Massachusetts - is going to have to figure out ways to lower the record US trade deficit of more than US$500 billion. Typically, borrowing in international capital markets finances US deficits. Japan, China, Taiwan and others have slowed the rate of intervention in currency markets so they have not been accumulating US dollars at the rate they were earlier this year. So not surprisingly, not having so many US dollars they are not buying so many US Treasury bonds. For now, Asian central banks seem content to go on accumulating US dollar assets. Of course, this is a big risk but there is no real sign that the Asians are shying away from buying US Treasury bonds if they need to. Any contraction in the US economy - especially in the information technology sector, Singapore's staple - is certain to affect this country. Still, even economic curmudgeons opine that Singapore's annualised growth rate for 2005 will be at least four to five percent. The bottom line: The much-ballyhooed contraction in the third-quarter doesn't mean that the economy is in bad shape. There are many risks out there of course but so long as our basics are right, Singapore can be resilient to these risks.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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