The Business Times
Published January 13, 2009
S'pore GDP to fall 4.5% in 2009: Deutsche Bank
Export recession, credit squeeze mean most Asian nations will see GDP plunge
By ANNA TEO
DEFLATION will emerge as a 'very real threat' this year in several Asian economies, including Singapore, as a result of the severe export recession, says Deutsche Bank's chief economist for Asia.
The spectre of falling prices - a bane for companies particularly - will disappear once oil prices start to rise again possibly next year, Michael Spencer said in an interview here yesterday. The Hong Kong-based economist was in town to meet with clients as part of a regional swing.
His GDP forecasts for the region are more bearish than the market consensus 'by a considerable margin' - especially on Singapore and Hong Kong in 2009, and on China's 2010 outlook, he told BT. 'Generally, the consensus expectations are about a percentage point higher than us, and it stems from (our) being generally more negative on the US and Europe.'
The German bank's forecasts see a 2 per cent contraction in the US economy this year, and a 3 per cent shrinkage in Euroland. Export-driven Singapore will be particularly hit, with its GDP expected to fall 4.5 per cent in 2009, according to Mr Spencer's forecasts.
That's the most bearish 2009 forecast for Singapore to date, and would be its worst annual contraction on record. The official GDP forecast ranges from a 2 per cent shrinkage to 1 per cent growth, while most other economists see a sub-3 per cent contraction.
Hong Kong is expected to suffer a 4 per cent GDP contraction, according to his forecasts, while the Taiwanese economy will shrink by 1.6 per cent.
Across the region, a combination of a huge export recession and credit tightening by Asian banks will result in a plunge in GDP growth, excluding China and India, to just 1.1 per cent this year, after an estimated 4.2 per cent pace in 2008.
'I think as we get into the third quarter, the data will start showing some improvement,' says Mr Spencer. 'I think the year-on-year deterioration in exports, industrial production, retail sales, will probably reach its peak or its nadir in the third quarter. Q3 will be the worst on a year-on-year basis.'
On a seasonally adjusted quarter-on-quarter basis, the current quarter or the preceding Q4 of 2008 will likely be the worst. For Singapore, it is 'possible' that the current quarter will see an even sharper contraction than Q4's 12.5 per cent q-o-q fall, he said.
'In the US, we're pretty confident that Q4 2008 was the worst of the q-o-q recession but we see another two quarters of shrinking GDP before things start to improve.'
He added: 'In terms of the crisis atmosphere, and the sharp sudden deterioration in activity, we probably have seen the worst. But I think, given that our forecasts are more bearish than consensus, I think people will still be surprised at how weak the data will remain for the next six months.
'There is no sudden turnaround in the global economy. It will be well into the year, probably the third quarter, before people start to feel that things are really improving, and they will improve slowly.'
Meanwhile, there will be deflation to contend with.
'If you go back to even after a relatively mild recession in 2001, a number of economies in Asia had three years of deflation, or going in and out of deflation, and I think we're entering another period like that.'
Inflation in Asia in the last two years was almost entirely a commodity price story, Mr Spencer pointed out.
'It was food and fuel prices going up. Certainly the fuel price story has completely reversed, and there's probably a little bit more downside on oil prices - they could probably go as low as US$30 per barrel. They probably won't rise very fast thereafter, but if OPEC makes bigger cuts than they've announced so far, conceivably oil prices will start to rise in 2010. That would be the only reason to expect an exit from deflation in Asia.
'If oil prices are sort of stable, then deflation will last for a couple of years, because we're opening up in a sense an enormous output gap globally. And the slow pace of recovery, in our view, means that the output gap won't close until 2011 or later. So you're not going to get genuine demand pressures for higher inflation for another three years at least. So the only reason to expect deflation to end would be to have a bullish view on commodities.'
In any case, the economies most at risk of deflation are the historically low inflation economies - Singapore, Taiwan, Korea, Thailand, and 'eventually' Hong Kong, once its 'lagged' rents measure in its consumer price index (CPI) catches up with current levels.
'Essentially housing costs disappear as a source of inflation; you're left with this weaker sort of inflation in clothing, transport, lower oil price, and eventually lower food prices as well.'
People will soon perceive deflation, even if the CPI doesn't really report it, he says. 'People will feel like it's a much more deflationary environment than the statistics show.'
The risk of a commodity price upsurge is low, he adds. Oil prices will likely bounce around in a wide range of US$30-US$50 this year. But a significant spike in perhaps 2010 will be enough to pull inflation back to positive territory in Asia, he says. But 'if oil prices just keep going sideways you'll have the CPI bounce around minus 1 per cent to minus 2 per cent for a few years.'
But deflation in Asia will not become a huge problem like it had been for Japan through the 1990s 'for the simple reason that these economies can be dragged out of recession and deflation very qiuckly, given how open they are', Mr Spencer says.
'Any return of growth globally will bring an end to recession; any reflation globally will bring an end to deflation.'
It was very difficult to restart growth in Japan because of several inherent factors, not least because it wasn't an open, export-driven economy with effective fiscal policies.
'It's quite easy to restart growth in Singapore - all you need is growth in the US and Europe, and we're confident we'll get that by the end of this year.'
But deflation will be an issue for companies 'in the sense that we'll get growth but it won't be enough growth that you're going to generate any significant pricing power, so pressure on companies to continue to improve productivity, even in an environment of positive growth by the end of this year or 2010, will remain.'
So while deflation for the export-sensitive economies in Asia will not hamper growth, it will hit corporate profitability and margins.