x Abu Dhabi, UAEFriday 19 January 2018

Singapore economic recovery draws on skewed statistics

Those pesky green shoots of recovery keep popping up, long before the spring thaw. The latest sprouts come from Singapore.

Those pesky green shoots of recovery keep popping up, long before the spring thaw. The latest sprouts come from Singapore. The little trade-dependent island state reported this week that its economy, after falling 12.7 per cent in the first quarter, rocketed 20.4 per cent in the second quarter. Hooray, global trade has recovered! The recession must be over! Not so fast. Those numbers are exaggerated by several factors. First, there is the way Singapore calculates them. Instead of just saying the economy grew by a certain percentage in one quarter, Singapore annualises the growth rate, reporting it as though the growth was sustained for an entire year. If the economy expands about 5 per cent in one quarter, that is equivalent to an annualised growth rate of about 20.4 per cent.

Singapore's roughly 5 per cent expansion in the second quarter is still pretty good and does technically mean Singapore has managed to pull out of recession. But its economy was nonetheless 3.7 per cent smaller than it was in the same three months last year. That would not matter for most developed economies such as the US. They report economic growth on a quarter-on-quarter basis to give a sense of the more immediate trajectory of the economy. Developing nations, on the other hand, typically report growth on a year-on-year basis. That is partly because they do not have the ability to produce timely and reliable data and partly because seasonal factors, such as agricultural output, tend to skew results widely from one quarter to the next.

Singapore is a developed nation, but it has a small economy. And while its GDP data in the past were a fairly reliable gauge of the trend, the data have in recent years become volatile and less predictable. That is because Singapore, faced with increasing competition in electronics manufacturing from China, managed several years ago to lure in major pharmaceutical manufacturers, the likes of Merck and Pfizer and GlaxoSmithKline.

The drug manufacturing plants have proved a double-edged sword: while they have boosted overall economic output, they are highly automated, meaning they have not created a lot of jobs. And to the chagrin of economists, they have also turned out to be highly sporadic. For one quarter, they churn out lots of drugs. But when the batch is done, they go quiet while technicians clean them out and prepare them to produce something else. So Singapore's GDP has become somewhat drug-dependent; zooming upwards as the drug production kicks in, and crashing when the dose wears off.

So it was in the second quarter: a surge in pharmaceutical production accounted for much of a rebound in manufacturing. The sudden bounce was enough to convince Singapore to reduce how much it predicts the economy will shrink this year to between 4 per cent and 6 per cent, up from a forecast of a 9 per cent contraction. Singapore also cautioned that the outlook remained clouded by the situation in the US and Europe, where unemployment is still rising and consumer spending remains weak. Almost one of every 10 American working-age consumers is now jobless.

As a result, the trade that is the lifeblood for Singapore, the rest of Asia and for other emerging markets such as those here in the Gulf has yet to recover. According to statistics from Singapore's maritime and port authority, container traffic through Singapore's port, one of the world's largest, was down almost 20 per cent in the second quarter compared with the same period last year. That is consistent with another indicator of global trade that some economists say still bodes ill for the global economy, the Baltic Dry Index. This index tracks the average price of shipping coal, grain and other major raw materials, or "dry" bulk cargoes, by ship. Because ships take a long time to build and cannot be broken up easily, their supply stays fairly constant. Thus the price of shipping tends to depend more on demand, and so economists use the Baltic Dry index as a leading indicator of trends in global trade.

After peaking in May last year at a record 11,974, the Baltic Dry Index began falling as exports collapsed and credit evaporated. By December, it had fallen 94 per cent to its lowest level since 1986. Bad days for shipping, yes. Dark days for the global economy, too. The good news is that the Baltic Dry Index has been recovering, rising to 4,291 by early last month as credit eases and trade resumes. In recent weeks, however, it began slipping again back below 3,000, indicating that things are not yet back to normal.

But it seems safe now to say that the worst is over and that a fragile, feeble, patchy global recovery is getting underway. As Standard Chartered's economists in Singapore conclude in their latest report, this is the end of the beginning of the crisis. "The absolute worst is over and in that context a 'victory' has been achieved, but there is still a long way to go," they wrote. Asia, it is clear, will lead the recovery. Singapore's numbers may exaggerate the trend, but the outlook for Asia's emerging economies is brightening faster than those for the heavily indebted US and Europe. While the export demand from the West they had depended on for much of their growth has yet to recover, domestic consumers and government spending are buoying home-grown consumption.

Demand from China, in particular, is helping to arrest declining exports elsewhere in Asia. Some are helped more than others. Those, such as Taiwan, that depend on shipping components to China for assembly and re-export to markets in the West, are not getting as much help from Chinese demand as, say, South Korea, which exports primarily finished goods. And since Asia is the UAE's largest importer of oil, what happens there matters a lot to us here. But much, as you can probably tell, will depend on how things go in China, which is due to release its own second-quarter economic data today. Economists predict that, thanks to massive government stimulus and compulsory lending, China's economy will manage to overcome still-slumping exports to post growth near 8 per cent in the second quarter. That may produce a modicum of warmth in China, but not enough to ignite a recovery globally. Whether it will protect green shoots elsewhere from the continued chill from Europe and the US may depend on how close they are sprouting to the source.