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.

Leave a Reply