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 SINGAPORE 00000671 002 OF 002 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