Managing a more volatile economy

By Robin Chan, The Straits Times, 16 Oct 2012

SINGAPORE barely avoided a technical recession, after the second quarter growth figures were revised upwards.

Still, the economy shrunk 1.5 per cent in the third quarter and appears to be slowing down.

This will be Singapore's second worrying slowdown in just three years. The last time economic contractions took place in such quick succession was in 2001, when the dot.com bust in the United States was followed by the Sept 11 terrorist attacks, and again in 2003, during the Sars crisis.

That kind of volatility was supposed to be a thing of the past.

Since the early part of the noughties, the two pillars of the economy - manufacturing and services - have been broadened and strengthened.

Within the manufacturing sector, the biomedical sciences industry went forth and multiplied, the marine and offshore engineering firms spread their sails and caught the wind, and the beleaguered electronics sector was jolted back to life.

The services sector has also become much more expansive and vibrant, as Singapore has grown as a top financial centre and tourist destination in the region.

Tourist arrivals hit a record 13.2 million last year, with $22.2 billion in spending, and is expected to top that this year.

It was hoped that a more mature and broad-based economy would be less buffeted by the slings and arrows of the global economy's fortune.

But rather than stabilise, there seem to be more fluctuations in economic growth despite diversification.

Is this a worrying sign?

A study in 2009 by then Nanyang Technological University economist Choy Keen Meng, who is now with the Monetary Authority of Singapore, showed that growth in Singapore had slowed gradually over the last four decades, while volatility - looking at the frequency of economic cycles from peak to trough - had increased.

The experience of the last four years suggests this is even more so the case today.

Volatility is unsettling, as it makes it difficult for businesses to plan for the long term.

It also affects consumer sentiment and consumption behaviour. Higher volatility, therefore, can lead increasingly to slower growth, economists have argued.

The reason for the increased volatility has been an increasingly interconnected and synchronised global economy. So despite Singapore's best efforts to diversify, there are limits to how immune it can be, given its small, domestic economy.

Yet, underlying the volatile numbers has been a surprisingly resilient economy.

The unemployment rate has remained relatively stable at 2 per cent, asset prices have continued on the uptrend due to strong demand, with resale HDB flats breaching the million-dollar mark and rising bank loan volumes. Many business owners are still bemoaning a shortage of workers.

If that is not a good enough indicator of things, one economist I spoke to recently said, only half in jest, to look at the long cab queues. (And it was not a rainy day.)

What is causing the current drag is the manufacturing sector, with a slowdown in electronics production.

While in the past an electronics downturn may have given the Singapore economy a heart attack, today it feels more like a heart murmur.

This is because with the increased diversity, the services sector has gained in importance as a growth-driver and jobs-creator, and is still going relatively strong.

Economists believe that the slowdown will therefore not be followed by higher unemployment, nor complicated by a credit crunch - making it appear more threatening statistically than in reality.

What all this shows is that diversification has indeed brought more resilience to the economy in spite of the increased volatility.

A Ministry of Trade and Industry's recent occasional paper on population and the economy highlighted how this "well-diversified portfolio of industries" has buffered the economy in times of economic shock.

It argued that this approach had in fact led to more resilience and shorter recovery times from recessions, such as the one in 2009.

During that financial crisis, Singapore recovered faster than both Hong Kong and Ireland - both also small and open economies - which had bet on a few, sentiment-sensitive industries linked to finance and property.

So when we speak of increased volatility, these days we mean that Singapore may suffer more frequent but relatively benign recessions.

In the circumstances, one key challenge is to carefully manage the resulting distortions that volatility imposes on business planning and consumer sentiment.

Policymakers must calibrate their statements and actions carefully to send the right signals in this increasingly volatile world.

At the same time, the increasing diversity and interconnectedness of Singapore's economy has created a myriad of economic and industry cycles. The toolkit for policymakers must therefore be expanded and calibrated more than ever before to manage this, rather than have one-size-fits-all approaches.

The uncertain fiscal future in the major economies of Europe and the United States means that these fluctuations will continue rather than abate in the years ahead.

Australia's Treasury Secretary Martin Parkinson said recently that "volatility will be a feature of the global economy for at least the next decade".

And it is even more important to keep policy focused on the medium and long term, and not be put off by or to overreact to the rising number of short-term shocks.

Even as our economy has achieved its goal of becoming more diversified and resilient, it has also become more volatile and complex. The road ahead will only get bumpier.