SINGAPORE (June 5): The International Monetary Fund (IMF) is calling the “Great Lockdown Recession”, which was triggered by the Covid-19 pandemic, “the worst downturn in nearly a century”.
For veteran economist Song Seng Wun of CIMB Private Bank, this recession is the fourth he has seen in his professional career, and judging from current indications, it is shaping up to be the “most extended”.
The much-anticipated V-shaped recovery within this year, in Song’s opinion, is unlikely to happen. Apart from sharp rebounds in the purchasing managers’ index (PMI) across developed countries, economies are likely to see extended periods of dismal economic data. For example, China saw “terrible” readings in early February before improving in May.
For one, trade volume and domestic consumption across many countries have been badly hit by the pandemic and global lockdowns. Song expects Singapore’s GDP for 2Q and the whole of 2020 to contract by 17.7% and 5.3% respectively, before clawing back 5.1% in 2021.
Although the pandemic was the significant turning point for most economies, Song says Covid-19 should not bear the full blame. “Growth was already slowing even before the pandemic due to US-China trade tensions, and we’re now essentially seeing the effects of the lockdowns and recession that follows,” he says.
‘All it takes’ approach
Thus far, the Singapore government has rolled out four Budgets in just as many months, bringing the country’s total stimulus package to the tune of $93 billion or 19.2% of GDP, in what it describes as an “all it takes approach” to combat the Covid-led economic downturn.
However, that sum of money needs to be put into proper context. Song points out that Singapore’s annual GDP, estimated at $500 billion a year, translates into between $1.4 billion and $1.5 billion in daily economic output. However, with the “circuit breaker” measures, he estimates the economy is taking a hit of between 30% and 50%, which is the equivalent to between $400 million and $700 million in foregone daily economic output. “What kind of spending can the government roll out to add value to the economy? It’s impossible,” quips Song.
“Even if the government steps up spending, private spending has collapsed so much that government spending in terms of rollouts in the Budgets won’t be able to turn the economy around,” he adds.
The way Song sees it, there is no way Singapore can avoid a recession, but the government’s efforts are “cushioning” the negative impact of the pandemic as it rages on. “Singapore is lucky to have reserves to fall back on. We have very deep pockets in terms of keeping the economy going without resorting to borrowing,” says Song.
Debt and green shoots
The danger though, says Song, is debt. At the tail end of 2019, global debt levels had already reached new highs. According to IMF, external debt of emerging and developing Asia hit more than US$4 trillion ($5.6 trillion). If 2019 was bad, Song says 2020 will see countries record even higher levels of debt as governments borrow from the future to support their economies now. “This can be a big constraint of growth,” for most countries, warns Song, unless it is the United States.
For all its politics, Song says the US is unique because its economy can take on high levels of debt without feeling the same kind of drag felt by other economies, thanks to its economic might and strong US dollar. “That’s the advantage of being No 1, when you are the largest and you owe people the most, people are worried that if you go bust, you could pull them down as well,” says Song.
For now, Song says markets would rather look beyond the dark period and focus on any initial sign of improvement in the economy.
“Many people are still staying at home after the easing of ‘circuit breaker’ measures, but this is the first step towards recovery,” says Song.
Looking ahead, Song says economic activity should gradually increase with the easing of more measures, which should kickstart the recovery. However, he cautions that this will still be “well below pre-crisis levels.”
At the ground level, many businesses, such as those in F&B, might not pull through. “They were already struggling before the pandemic because the economy was already slowing,” says Song. “But with the introduction of circuit breaker measures, many have already shut their businesses.”
To survive, companies need to embrace the “new normal” and to take advantage of opportunities at hand, Song urges. “Even in recessionary conditions, it’s different this time with technology making a huge difference,” he says.
For example, during the Asian Financial Crisis, the world was a much less connected place. “The bad thing about us being integrated is the impact is felt immediately and amplified. But the good thing about tech is it allows you to not just to tap neighborhoods but the region as well,” he says.
“The rise of technology has created opportunities for people and businesses. Digitalisation and blockchain can be a great help to the supply chain, with new businesses and activities being created,” adds Song.
