Singapore GDP tumbles

First take
Singapore's GDP contracted 3.7 percent year-on-year in the fourth quarter, after a revised 0.2 percent contraction in the third. On an quarter-on-quarter annualised rate, GDP was 16.9 percent lower. The numbers are much worse than expected. Growth for 2008 in total was 1.2 percent year-on-year.

The numbers

Third quarter GDP numbers were upwardly revised. GDP fell 0.2 percent year-on-year in that quarter, instead of 2.6 percent year-on-year.

Manufacturing output fell 10.7 percent year-on-year in the fourth quarter, after a 10.9-percent drop in the third. Manufacturing output fell 4.1 percent for all of 2008, after a 5.8-percent expansion in 2007. Construction activity was 14.1 percent higher, although slowing from a 20.3-percent expansion in the third quarter.

Service sector output was 0.1 percent year-on-year lower.

The latest production numbers show industrial production fell 13.5 percent year-on-year in December, after a 6.6-percent drop in November.

The government has revised down its GDP forecast for 2009. It expects output to contract 2 percent to 5 percent. A 5-percent contraction would be the biggest contraction on record. GDP fell 2.4 percent in 2001, by 1.4 percent in 1998, and by 3.9 percent in 1964. The government also predicts deflation; consumer prices may fall 1 percent to 0 percent in 2009.

The government is bringing forward its 2009 budget announcement and will release it tomorrow.

Behind the numbers

The fourth quarter GDP numbers are a shocker. Even with downbeat expectations, the depth of the slump will come as a surprise for most observers of Singapore's economy.

Most sectors of the economy are facing unprecedented conditions. Exports are plummeting. Electronics demand, especially demand for components from China, continues to fall. Meanwhile the production of certain components such as for mobile phones continues to shift to lower cost countries. Pharmaceutical exports remain stuck in lower-value production, and continues to be a volatile and unreliable source of growth. Chemicals and oil-related production is falling in value due to the decline in oil prices.

In terms of services, while they expanded in 2008 this was mainly due to a robust performance in the first half of the year. Sectors such as finance and tourism have a bleak outlook.

There is only one clear support for the economy: the government. Construction continues to grow, although the pace is slowing. Nevertheless the construction of public housing and infrastructure projects will provide some stimulus to the economy. Spending plans, to be announced tomorrow, will likely help ease the burden of unemployment.

Government forecasts put growth at -2 percent to -5 percent for 2009. A result at the worse end of the scale would put 2009 as the worst year on record. Although government spending could alleviate some of the pain, its growth forecast would likely have incorporated its own budget plans. A recovery will only occur in line with the rest of the world.