And the recession drags on

The newspaper headlines in October may have screamed that the economy had finally turned the corner with the first year on year growth since it emerged from recession. But beneath the apparently good numbers was the grim reality that many of Singapore’s industries remain mired in an intractable recession.

This is now a two tiered economy. The headline GDP for the three months ending September 2009 showed a 0.8% GDP growth, which in itself was buoyed by an unusual and volatile explosion in pharmaceutical and medical engineering and the double digit construction boom that continues unabated across the island.

If not for these two sectors the economy would have looked sick indeed. Manufacturing for July and August actually dropped 7% year-on-year, and the services continued its decline, dropping a further 2% year-on-year. This explains why many businesses in Singapore, especially the services sector, feel that there is no recovery in sight. 2009 will still shape up as a recessionary year with the economy expected to shrink overall by 2% this year.

This is a bitter pill to swallow for all but those working in biomedicine, and means wages and new jobs will be hard to come by. “At this stage, the fact that marginal growth is currently driven by biomed means the implications for the real economy in terms of employment are likely to be small, given the low labour intensity but high capital intensity of the biomed sector. Indeed we think that the upcoming recovery is likely to be uneven. Among ASEAN economies, Singapore has seen one of the most aggressive capacity expansion, given the property boom.

Hence, capex recession is likely to persist as corporates wait for capacity utilisation to normalise before engaging in further expansion plans. With capex plans likely to be weak, and given the correlation between the former and job creation, we suspect labour market conditions are also likely to remain soft for awhile,” noted Morgan Stanley. Service industry still strugglingSo while the manufacturing is showing some signs of recovery, services remains particularly hard hit. So how is main street Singapore faring ? Roberto Galetti, Chef-Owner of Garibaldi Group of restaurants, told Singapore Business Review his restaurants saw a 35 % drop in sales year-on-year from 2008.

“The quantity of our customers has not decreased, but their spending power has dropped. People don’t want to be seen with an expensive bottle of wine.

The peak year in terms of sales for the restaurant was in 2008, before the crisis hit.” Customers who previously spent $400 to $500 at his restaurant for a meal now spend at maximum $100 to $150 a meal, said Galetti. Customers have also begun to switch to entertaining clients at lunch instead of dinner where they would have to buy bottles of wine.

Discounting has now become a problem for restaurateurs. “I have customers coming to me and asking: ‘why don’t you give me a discount, the other restaurant is giving me a 40% discount?’ The thing with these restaurants is they probably won’t be able to survive for long.” But the reality is it is causing losses.

Galetti hopes the IR will help sales. “We project at least 10% growth in 2010. With the opening of the new casino, more people should be flying into Singapore, and that will be good for us.

Still, I don’t think any company can go back to the year of 2008. That was really an exceptional year for us.” Given real retail spending has fallen about 20% since the start of the 2008 crisis and is still on a downward spiral, the suffering service sector may need more than a slick new casino to inspire the confidence consumers need to really start spending again.

Michael Ma, who owns the Indochine Restaurant Group, also noted the downturn had affected customers spending. “In the first half of the last year, we had a drop in 10 -15% in profit. The customers are still coming, but instead of going for high champagne brands or boutique wines, they’re ordering average wines which cost about $90 to $100. They’re still coming, but they’re spending less. “So will 2010 bring better news ?

Not really, even though economists expect the economy will show a headline increase of 4 %. A critical issue is the job market which is expected to remain very weak.

A survey done by the Ministry of Manpower showed a slightly improving job outlook among employers who expected to add more staff than to fire more staff. The reading was 5 % but during the good times of September ’07 the level was 70 %.

But still, it is better than the -40 % reached during the low of April this year. So does this mean the job market will stage a strong recovery ? Not necessarily because if hiring is ultimately tied to final external demand, and with that capex expansion, the excess slack in the system and the time needed for capacity utilisation to normalize means that even when job declines eventually reverse, job creation could likely stay weak, notes Morgan Stanley. With new labor market entrants every year, job creation has to reach a certain level below which the unemployment rate will still continue to rise. If there is a silver lining to this dark cloud of a weak, jobless recovery it lies in forecasts that interest rates will remain low for a considerably long time which will help struggling businesses and the indebted jobless. “Separately, with MAS operating a managed exchange rate policy and given the open capital account and the possible trinity, interest rates in Singapore are invariably “imported” from elsewhere.In this regard, the 3M SIBOR could remain low for awhile amid the easy monetary policies in the developed world.

We expect the 3M SIBOR to remain at around current levels of 0.7% before rising in 2H10 to reach 1.3% by 2010 year-end. In this scenario, the likelihood remains that government authorities will have to contend with continued asset reflation alongside still soft macro fundamentals,” noted Morgan Stanley.