A couple of days back, it was reported that Singapore had successfully avoided a recession as early estimates showed an expansion in the overall economy this quarter by 0.1%.
The local media has provided coverage on this, which in this instance, essentially meant it reproduced the press statements issued by the Ministry Of Trade And Industry, supplemented with motherhood statements from bank economists for some forecast that nobody else (except for other economists!) really cared about or even understood.
We decided we should understand what is actually going on in our country. Last we heard, during the General Elections, Singapore belonged to all of us.
What Is A Recession?
A recession, defined by Investopedia as “a significant decline in activity across the economy, lasting longer than a few months.” As you can see, the definition is pretty broad, and can be opened to different interpretation.
What is commonly accepted by economists and journalists is the definition of a “technical recession”, which is when “an economy experiences two consecutive quarters of negative economic growth as measured by a country’s GDP.”
According to most media, Singapore narrowly avoided a technical recession as we reported a positive 0.1% growth in 3Q2015 from the previous quarter (2Q2015), compared to a negative 2.5% growth that was reported in 2Q2015 against the quarter before (1Q2015).
Had we experience a negative growth; we would have been looking at a technical recession.
Taking A Closer Look At The Actual Numbers
There are many variations of GDP figures and different methodologies behind calculating whether or not gains (or loses) have been made. It is not easy to comprehend, let alone explain, which is probably why not many people understand it, care about it or would actually read about it (if you got this far – congratulations!).
Let’s take a look at some of the key trends and observations worth noting.
The Economy Is Still Growing
GDP in 2Q2015 was S$96.5 billion, based on 2010 market prices. This is important to know, because it takes into consideration the output with reference to a fixed price. As we know, total output can increase (or decrease) if prices of a certain good increases (or decreases) even if the actual output remains the same.
For example, if we build 100 computers in a quarter and sell it at $2,000 a piece, the economic output that the country would record will be $200,000. By decreasing the price to $1,800 in the next quarter, the total economic output will fall to $180,000 (or 10% less), even if actual output actually remains the same.
Here is a table for you to observe the differences.
|GDP (Based On 2010 Price)||$96.0 Billion||$96.5 Billion||0.5%|
|GDP (Based On Market Price)||$99.1 Billion||$98.5 Billion||(0.6%)|
As you can see, actual output based on a fixed price level (2010 prices) actually increased in 2Q2015 from the quarter before. It only contracts when you take into consideration current market price.
Recovering From A Drop Of Negative 2.4% From Previous Quarter
You may have read that the Singapore economy was negative 2.4% in 2Q2015. But why did our numbers showed negative 0.6% instead?
Quarter-on-quarter growth rates are usually reported on an annualised basis. That means that they are extrapolated to account for a full year. Basically, the contraction of 0.6% experienced in 2Q2015 (based on market prices) would be multiplied by 4 quarters to give the figure of – 2.4%.
In a way, both gains and losses will always be amplified on a quarter-on-quarter basis because the rates are annualised.
The Limitations Of Quarter-on-Quarter Measurements
One of the limitations that a quarter-on-quarter measurement could consist is the fact that it penalises strong, sudden growth in the economy at any one quarter by raising the standards and making it difficult to sustain output in the following quarter.
Here is an analogy. Supposed a student obtains a result of 50 marks for his 1st term examination. He goes on to study harder, and is rewarded with an impressive 75 marks in his 2nd term examination. His parents are delighted with the 50% improvement he has made.
During his 3rd term examination, he scores 70 marks and in his final term, he scores 68 marks. All things being considered, he has done relatively well and has made improvements. Yet, a term-by-term analysis of his scores would show that his grades have “fallen”, with a decline of 7% and 3% respectively over the last two terms. The same limitations extend to quarter-on-quarter GDP growth.
When you consider the fact that the S$96.5 billion (based on 2010 prices) made in 2Q2015 (the previous quarter where our economy supposedly weakened) was as high as any quarter ever recorded, with the exception of 4Q2014 (4th quarter usually shows better numbers), it is hard to understand what the big fuss is all about.
Looking At A Year-On-Year Growth
Since we know there are limitations with a quarter-on-quarter outlook, let’s take a look at year-on-year growth instead.
What year-on-year growth does is that it compares the results of a certain quarter against the results in the same quarter the year before.
Quite simply, what this table shows is that when you look at growth from a year-on-year basis, the Singapore economy has been, and continues to be, expanding. Period.
What All These Means For Singaporeans
There is no point trying to over infer macroeconomics statistics, which could be hard to relate to the average Singaporean.
What we do know is that the economy is slowing down, which should be no surprise to anyone who is remotely paying attention to what’s happening in the world with China’s slower growth and persistent debt worries in Europe. The recent stock market decline and the regional haze situation have not helped either.
With all due respect to the severity of past recessions in Singapore, we like to leave you with a quote from Peter Lynch, one of the leading stock investors of our generation.
Recessions, (I figure), will always end sooner or later, and in a beaten – down market there are bargains everywhere you look, but in an overpriced market it’s hard to find anything worth buying – Peter Lynch
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