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Buckle up for a double-dip recession!

Recently the flow of economic news from all around the globe has been dire. The US kept its precious AAA rating and increased its debt ceiling but only by agreeing to a deficit cutting deal.  Meanwhile the US economy expanded by just 0.4% in the second quarter of this year.

At home our own Ministry of Trade and Industry announced on 14th July 2011* that Singapore’s economy grew by just 0.5% in the second quarter year-on-year but actually fell by 7.8% on a seasonally-adjusted quarterly annualized rate. The recent deficit-cutting deal in the US and the pressures on the more indebted countries in the Euro zone to cut their deficits means that demand for Singapore exports is likely to weaken further. If our economy contracts in the third quarter, as seems highly likely, then we will have entered a double-dip recession. (And don’t say I didn’t warn you!)

It is depressing to see all these calls for deficit cuts when economies are so weak. It seems as though the lessons of the Great Depression have been forgotten and that we seem to have gone backward. Politicians in the US (including the President), the UK and Europe seem to believe that cutting deficits through  cutting government spending or raising taxes when their economies are growing far below their potential, is somehow going to restore business confidence. They feel these moves will spark an investment boom to replace the cut government demand.  But interest rates are near zero so government borrowing is not crowding out private sector investment, anyway. In fact we are close to what Keynes refers to as The Liquidity Trap. It is possible that quantitative easing on a greater scale can get the World economy out of that trap. Meanwhile unemployment in these economies is running at around 10% minimum so these economies are clearly performing well below their economic potential.

At the same time I have failed to understand the furore among the Tea Party Republicans at increasing the US debt ceiling and the accompanying threats by the ratings agencies to downgrade the US from its current AAA status. After all the US debt is all denominated in dollars and therefore in the last resort it can be repaid by the Federal Reserve printing more money.

“Hang on a minute!” some of you might say. “Won’t that result in the hyper-inflation and the rapid depreciation of the dollar? Surely China will punish the US by cutting its holdings of US Treasuries and allow the dollar to collapse?” I’ll answer by quoting the old adage that a borrower who owes the bank $1 is owned by the bank while a borrower who owes $1 million owns the bank. In fact any unilateral action by China would cause far more economic damage to China than it would the US as it would instantly devalue China’s massive reserves. Also if the dollar were to collapse it would cut off the US market as a source of demand for Chinese goods. China (and also Japan, Taiwan, South Korea, Singapore and Germany) relies on external demand as the source of growth for its economy and a big shortfall in external demand would rapidly transmit itself to recession in China.

As the continued survival of the Chinese Communist Party is highly leveraged to its growth rate (note the recent protests by Taxi drivers) China is likely to either rebalance its economy towards domestic sources of growth, which would be positive for the world economy, or keep buying US debt. In fact the only good thing about the deficit-cutting deals would be if they could force an adjustment in the chronic surplus countries more towards domestic demand to generate growth. This would remove a big drag on growth in the deficit countries.

So how is this relevant to Singapore’s situation? As I said above, Singapore’s economy, even more than China’s or Germany’s, is dependent on net exports for growth. In fact, in 2010 net exports of goods and services amounted to almost exactly one-third of the economy. The corollary of this is that savings are about 50% of GDP and consumption is about 41%, a level very similar to China’s. Vladimir Putin, the Russian President, recently described the US as a “parasitic” economy because of its big twin deficits (balance of payment and government). However I believe it is much more correct to say that economies like China’s and Singapore’s (and also Japan’s and Germany’s) are parasitic since their huge external surpluses are big drags on growth in the rest of the world.

The US has recently been calling for rebalancing by the world’s surplus economies directing some opprobrium at China over its surplus. If Singapore doesn’t attract this opprobrium it is not because our PAP economists have the answers but rather because we are currently simply too small to impact on the global level if we do not rebalance our economy. But the impact of a double dip recession will be felt by us on a national level. Singaporean businesses are likely to sack Singaporeans first and keep the cheapest labour in their work force.

The PAP’s desire to run big surpluses and keep accumulating savings and overseas assets rather than allow our citizens to enjoy a higher level of consumption and standard of living are symptomatic of the fact that our leaders are in thrall to outmoded theories that no longer make any economic sense. In particular the mercantilist theories of the 17th century French economists like Colbert and Say that exports are good and imports bad or even the response of the Qianlong Emperor to the trade mission sent by George III**. So there is no pressure on the government to rebalance the economy at the global level. And no pressure on the national level either due to the lack of political pluralism. In fact amongst the opposition, there seems to be a complacency or reluctance (for the most part) in formulating a coherent, alternative macro-economic policy. Most Singaporean alternative voices would still not presume to question the economic expertise of the PAP at the macro level.

Singapore is more fortunate than the US in that it is easier for the government to offset any big slowdown in external demand by rebalancing the economy towards domestic consumption. But whilst in China taxi drivers riot there is still no hope here that outmoded economic policies will ever be overturned by popular pressure. In fact what is politics, if it is not public opinion shifting and parliament acting in response to that pressure? The failure of our economy and the oncoming recession will be a failure of our politics.




  1. If Singapore is going to face a “Double-dip recession”, I certainly hope the PAP government is ready for it and has measures in place to cushion its impact. Inflation is now on the rise and I am facing the impact as a low-wage earner. Now, with the Presidential Elections approaching, I certainly hope a new President who is sympathetic to the needs of the poor will be elected, so that if there is a need to dip into our reserves, it will more readily be done; ofcourse after getting Parliament’s approval too.


  2. When the time bomb finally blows up, I wonder how much GIC and local Investment firms will lose, how it will affect us financially and Singapore’s economic stability? Have we really reach the point of no return and a New World Order is coming?


  3. PS For the uninitiated, could you explain what “seasonally-adjusted quarterly annualized rate” means?

    Thank you


    • Quarterly annualized rate means the quarter-on-quarter percentage change converted to an annualized figure by raising it to the fourth power. Thus a 2% quarterly change becomes a 8.24% annualised change. Seasonal adjustment is an attempt to remove seasonal factors from the data so as to make clearer the underlying change. For example unemployment figures used to go up in the UK when the students signed on for unemployment benefit in the summer but then went down again when they returned to uni in the autumn. Seasonal adjustment attempts to remove this effect.


  4. Very perceptive and timely warning, Kenneth. I have always been wondering about why the government seems to have this arrogant display of fiscal know-it-all. They have dismissed all alternative voices though they make a lot of sense. I refer specifically to your articles over the last 2 years. The use of the strong Sing dollar as a solution seems to have lost steam. This “growth at all costs” approach is doing harm more and more Singaporeans. Keep the pressure on, Ken and let’s hope they will acknowledge good sense and wise solutions are not exclusive to the PAP.


    • Hi Andrew. I’m sorry that this is the second time you’ve asked but I’m afraid that I just don’t get the analogy. Gardening analogies always make me nervous anyway, as they remind me of Peter Sellers in the movie, ‘Being There’- where a simple gardener is mistaken for a sage political pundit when he is asked about green shoots. Could you clarify your question for me? Don’t weeds also have green shoots? I’m afraid I don’t get it.


        • Thanks Michael. I see that fresh weeds is your answer to the PM’s talk of green shoots. It would appear that the Prime Minister hasn’t seen Peter sellers in ‘Being There’. As I said , I am always suspicious of gardening analogies. I will read your article and get back to you. Briefly I will mentioning that I have been predicting this since 2009 and warning Singaporeans that our leaders are propagating dead ideas.- the economic theories of zombies.


  5. The MAS’ futile attempt to fight inflation by allowing the Sing Dollar to strengthen from around 1.37 to the US Dollar in mid-August 2010 to close to 1.20 now will continue to act as a huge drag on exports. The government is caught between a rock (domestic inflation) and a hard place (exports) and has no answers to the economic questions facing the country.

    Yet, the Prime Minister says the country’s economic policies will not change (“my answer is no” to investors asking whether the country will change direction see Quite extraordinary!


  6. Thanks for your insights on the global impact of SG economy. I wonder if you care to do a piece to educate the readers on our high public debts, where that comes from and what it means to ordinary singaporeans? Many thanks and best,


    • Thanks Angela. I’ll try to do that. Meanwhile please refer to the thread on the online citizen facebook version and the comments under the link to my blog. I answer thus:
      “Kenneth Jeyaretnam If I may answer some queries thrown up here-@ Lye-Kiat Chua. You are right about the US stats and you did read correctly when I wrote that it is easier for S’pore to rebalance the economy towards domestic consumption.
      By this I mean that Singapore has more fiscal room to manoeuvre than the US as it runs such a large surplus. It can cut taxes and increase spending which will raise domestic incomes and have a positive effect on the economy. The US has a large deficit and by cutting its deficit in a similar way it will have a negative impact on its domestic incomes and employment.
      @Ran Ran Sin that is like saying we can’t have a demand driven economy until demand rises. Another good reason for introducing minimum wage and cutting the level of compulsory savings maybe?”


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