S'pore growth will shudder if eurozone breaks: report

S’pore growth will shudder if eurozone breaks: report
It is likely to be most affected among Asian countries, ex-Japan
By Teh Shi Ning, Business Times

[SINGAPORE] Singapore’s growth will be hardest hit in non-Japan Asia if the eurozone should break up, Credit Suisse’s projections show.

While the estimates come with a “sizeable health warning” given huge uncertainty, they do shed light on how Asia’s economies might fare relative to one another if Greece should exit the eurozone, Credit Suisse economist Robert Prior-Wandesforde wrote in a report released yesterday.

In a more severe scenario of a break-up triggered by a Greek exit or escalated Spanish problems, Singapore’s GDP could suffer a blow of 9.4 percentage points, a tad higher than Hong Kong’s 9.3 percentage points and the largest hit of the 10 Asian economies surveyed.

This scenario, which assumes a 7 to 10 per cent contraction in eurozone GDP, a 25 per cent drop in eurozone imports and 8 per cent US import demand, would probably send Singapore, Hong Kong, Taiwan and Malaysia into a deep recession, Mr Prior-Wandesforde said.

A eurozone break-up could send Korea’s year-on-year GDP growth into negative territory by year-end too, while China and India’s growth could slip to what may “feel like a hard landing”.

Even in a milder scenario, which assumes that Greece exits the eurozone in the next few weeks but with little contagion to the rest of the currency area, Mr Prior-Wandesforde estimates that Singapore’s growth will again be worst-hit, along with Hong Kong.

The estimated negative impact on Taiwan was slightly less at 2.2 percentage points.

Estimates of the trade effects of a limited Greek exit were calculated based on a 2 per cent peak-to-trough fall in eurozone GDP, a 6 per cent drop in eurozone imports and 2 per cent drop in US import demand.

They can be considered optimistic forecasts, since they only account for the impact of weaker external demand on trade, and not other modes of transmission such as a drying up of trade finance or a withdrawal of funds from Asia to pad up European balance sheets.

After the initial blow, which could be at least as large as that dealt by the global financial crisis, the subsequent recovery in Asia is likely to be less impressive this time round.

“The Western world has largely run out of policy ammunition, Asian interest rates are lower than they were in mid-2008 and budget deficits are generally higher in the region,” he wrote.

Mr Prior-Wandesforde said he attempted to quantify the impact of weaker trade on GDP growth, despite the huge range of potential outcomes, as the potential impact from a eurozone break-up is an issue that “cannot be ignored or wished away”.

One consolation is that these scenarios, while possible, are not Credit Suisse’s central view for the year. Its research team believes the eurozone will “muddle through” the rest of the year intact.

If that comes to pass, Credit Suisse projects that the local economy will grow 3 per cent this year, at the top end of the government’s 1 to 3 per cent forecast range.

Economists warn of deep recession for Singapore if euro zone breaks up

Singapore could sink into a deep recession if Greece’s debt crisis leads to a break-up of the euro zone and causes another global downturn.

The warning came from economists on Wednesday who outlined a range of nightmare scenarios that, while appearing unlikely at present, remain possible if events spiral out of control.

The downbeat assessment also dovetailed with a new survey on Wednesday showing that Asia’s top companies are less optimistic about their business outlook.

Credit Suisse economist Robert Prior-Wandesforde painted two gloomy narratives that could result in the European monetary union falling apart in the coming months.

The first is one where Greece leaves the grouping but contagion to other European countries is limited; the second involves Greece leaving and contagion spreading.

If this second scenario transpires, Mr Prior-Wandesforde said Singapore would likely experience a deep recession by the year end with the economy contracting 4.6 per cent in the fourth quarter.

If this happens, the economy would be down 0.6 per cent for the whole year, similar to the 1 per cent fall in gross domestic product experienced in 2009 following the financial crisis.

Singapore is officially expected to grow between 1 per cent and 3 per cent this year, the Trade and Industry Ministry has said, although it too has warned of rising risks over the euro zone crisis.

‘This scenario assumes the most immediate impact, through the trade channels and exports to Europe and the United States,’ said Mr Prior-Wandesforde yesterday.

‘There are likely to be other negative implications as well. These include a drying up of trade finance, as witnessed during the financial crisis, as well as a withdrawal of funds from the Asian region to shore up European balance sheets.’

Bank of America Merrill Lynch economist Chua Hak Bin agreed, saying his model showed that an ‘ugly bear case’ could mean a 1 per cent contraction for Singapore’s economy this year.

‘We are worried about the financial contagion channel, which could see credit freeze up and affect many businesses,’ he added.

Mr Prior-Wandesforde was also less optimistic on the prospect of a quick recovery this time as governments have less financial power for another huge stimulus.

In 2010, Asia saw a quick and remarkable V-shaped recovery from the 2009 recession.

Singapore grew at a rapid 14.8 per cent that year, more than making up for the 1 per cent contraction.

Capital Economics noted that Asian governments are better placed than their Western counterparts to pump prime their economies this time but the region also has less firepower than in 2010.

It noted that both Hong Kong and Singapore have the healthiest fiscal positions in Asia, with large surpluses and reserves.

‘However, as trade-dependent economies with big financial sectors, they are the two places in Asia most vulnerable to a crisis in the euro zone and most exposed to another global downturn,’ it said.

‘As a result, even expansionary fiscal policy is unlikely to prevent these two economies from falling into a deep recession if exports slump.’

Fortunately a Greek exit is unlikely to happen in the next six months. Credit Suisse puts the probability at about 20 per cent while Swiss bank UBS says the chances of Greece leaving the euro zone are less than 10 per cent.

Meanwhile, a recent survey showed that Asia’s top companies are now less upbeat about their business outlook than in the first quarter.

The Thomson Reuters/Insead Asia Business Sentiment Index fell to 69 last month from 74 in March.

A reading above 50 indicates an overall positive outlook.

Of the 177 companies polled, 78 said their business outlook for the next six months was positive, while 87 said it was neutral, and 12 said it was negative, Reuters reported.

The poll was conducted between June 4 and 15.

Asked what the biggest risk factor they faced was, 111 companies said global economic uncertainty, and 28 cited rising costs.

‘Things are looking tougher with what’s happening in the global economy. Asia is not fully insulated but will still do relatively better, given that most governments in the region still have leeway to stimulate domestic economies,’ Aberdeen Asset Management Asia investment manager Kristy Fong told Reuters.

‘Cost pressures are another issue, such as rising inflationary pressures in Singapore (and) infrastructure and logistical bottlenecks in India.’

OCBC Investment Research analyst Carey Wong noted that consumers were turning more cautious in placing orders.

‘As long as customers don’t give them very clear order indications, sentiment won’t be that good. As a business owner, you can’t plan ahead, such as planning capital expenditure.’