SINGAPORE PULLS OUT OF RECESSION, TECHNICALLY

UNCLAS SECTION 01 OF 02 SINGAPORE 000671

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN SN

SUBJECT: SINGAPORE PULLS OUT OF RECESSION, TECHNICALLY

REF: A) SINGAPORE 355; B) SINGAPORE 80


1. (SBU) Summary: Singapore's economy showed positive growth
during the second quarter, unofficially marking the end of a
year-long recession. Advance estimates are that Singapore posted a
20.4 percent expansion over the previous quarter, though still a 3.7
percent drop from the same period in 2008. Much of the growth was
led by the volatile biomedical sector that may not be sustainable,
but growth continued in the tech sector, construction, financial
services and property. Although the government cautioned that a
full recovery would still be slow in arriving, economists are
increasingly confident that recovery is approaching faster than
previously expected and are revising upward their growth forecasts
for the year. The labor market has shown to be more resilient than
expected, but higher than normal levels of unemployment will likely
continue as companies work through excess labor capacity. The
government is unlikely to put forward new fiscal or monetary easing
to further jolt the economy. End Summary.

Recession Is Over (If You Want It)
--------------


2. (U) Singapore's Ministry of Trade and Industry (MTI) released
advance estimates July 14 for GDP growth in the second quarter,
showing robust quarter-on-quarter seasonally adjusted growth of 20.4
percent, technically ending a recession that saw four consecutive
quarters of negative growth. The estimates are based primarily on
data from April and May and final figures will be released in
August. The quarterly growth is Singapore's strongest since the end
of the last recession in 2003. On the back of the new data and what
it termed a subdued outlook for the rest of the year, MTI raised its
forecast of annual growth to a range of -6.0 percent to -4.0
percent, up from the -9.0 to -6.0 percent prediction that it made
after the first quarter.


3. (U) Manufacturing led the revival in GDP figures, contracting
only 1.5 percent year-on-year (YOY),compared to a 24.3 percent
contraction in the first quarter. Manufacturing output was up 13.2
percent in April and May compared to the first quarter's average.
However, the growth was led by the highly volatile biomedical
sector, which leapt 138 percent YOY in May, a rate highly unlikely
to be sustained. Nevertheless, economists see a gradual trend of
recovery in manufacturing that has broadened from electronics into
chemicals and precision engineering. The Purchasing Managers Index,
a forward-looking indicator based on a survey of purchasing
executives, hit its highest level in June since December 2006.
Services were the biggest drag on the economy, contracting 5.1
percent from a year ago.


4. (U) GOS statements have been careful to manage expectations,
pointing out continued weaknesses in the Singapore economy and
predicting a slow recovery. MTI's statement dismissed the
biomedical output as a "spike", and described the boost in
electronics manufacturing as inventory restocking which may not be
sustainable. MTI noted as well rising unemployment and reduced
consumption in its main export markets in the United States and
Europe and the lack of evidence of any improvement in final demand.
Finance Minister Tharman recently warned an investors conference
that while the worst was over, recovery would be slower than in past
recessions. Tharman pointed out that the U.S. consumer is saving
more, while growing Chinese consumption would be unable to
compensate.


5. (SBU) Nevertheless, local economists are more optimistic and have
been revising their growth forecasts upward amid hopeful signs that
the recovery will be stronger and sooner than earlier anticipated.
HSBC economist Robert Prior-Wandesforde said in a recent paper that
the bank now expects a strong V-shaped recovery to follow for the
rest of the year, pointing to increased activity in the property
market, financial services and construction. Citigroup analysts
expect second half growth to taper off, but for the economy to
return to pre-recession peaks by the second quarter of 2010.
Although the momentum in manufacturing will probably slow, Citigroup
sees that offset by a gradual recovery in trade-related and retail
services and momentum in property markets and construction.

Employment To Lag
--------------


6. (SBU) Despite the better than anticipated growth figures,
unemployment will likely continue to rise as the manufacturing
sector struggles to recover. Nevertheless, the labor market has
been more resilient than previously expected. Economists at Credit
Suisse give credit to government programs to subsidize worker
salaries and training that may have saved tens of thousands of jobs,
as well as employers who opted to reduce wages and bonuses rather
than head count. Firms have also shortened work weeks and put staff
into training programs rather than letting them go. However, these
same cost cutting measures will likely slow recovery in the job

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market as firms re-extend work weeks and bring temporarily redundant
employees back onto the rolls.

No More Easing
--------------


7. (SBU) With the improvement in the economy's prospects, analysts
believe it unlikely that there will be further fiscal or monetary
easing anytime soon. The Monetary Authority of Singapore, the
central bank, eased monetary policy in April (ref A),but will
likely keep its policy intact at the next review in October.
Further, only a few weeks ago there were rumblings of a secondary
fiscal stimulus to build on an expansionary budget unveiled in
January (ref B),but those rumblings have since subsided and
analysts are expecting the GOS to hold off on any new stimulus
programs.

SHIELDS