SINGAPORE: Even as the global economy recovers from a historic recession brought on by the COVID-19 pandemic, concerns are already being raised about the next downturn.
Contributing to this is a gloomy mix of uncertainties, including the ongoing war in Ukraine, COVID-19 flare-ups in China that have led to crippling lockdowns and central banks, in particular the US Federal Reserve, stepping on the monetary tightening pedal.
These add to an already turbulent backdrop of global inflationary pressures amid rising energy prices and frayed supply chains caused by the pandemic.
Prime Minister Lee Hsien Loong recently warned that a global recession could occur within the next two years.
“Inflation will remain high. Central banks in the developed countries are tightening their monetary policies, raising interest rates. Global growth will be weaker,” he said at the annual May Day Rally.
And Singapore, being a price-taker, will not be able to avoid these global headwinds. The country must prepare for more economic challenges ahead, Mr Lee cautioned.
Q: How real is the global recession risk?
The likelihood of the world sinking into another recession has indeed risen given how risks such as the Ukraine war have wide-ranging ramifications and uncertainties loom over how they could pan out, according to economists that CNA spoke to.
The real danger comes when business and consumer confidence start taking a hit, economists added.
CIMB Private Banking economist Song Seng Wun said even though prices of goods and services have been rising, pent-up demand and "revenge spending" have so far helped to sustain consumer demand. But if prices continue rising - fuelled by the war in Eastern Europe or further supply chain snarls due to lockdowns in China - to the point where people feel that living costs have outpaced wage growth, they may become more cautious and pull back on spending.
Likewise, businesses have been able to pass on rising costs to consumers and keep on hiring on the back of continued demand. But once the latter wanes, firms worried about the future may turn to cost-cutting measures, such as paring back investments, hiring or worse, layoffs.
This spiral down in economic activities is “when things start to get serious”, Mr Song said. “This is where we may see the start of slower growth – whether it becomes a recession will very much depend on the pace of the deceleration in growth momentum.”
Another example is the impact of rising interest rates.
The US Fed announced its biggest rate hike since 2000 on Wednesday and noted that more increases “will be appropriate”. It is not just the Fed; other major central banks are also “frontloading a lot of policy tightening” in a bid to fight rising inflation, economists said.
This affects all borrowers who will have to adjust to servicing higher interest rates – be it businesses looking to take a loan or the average person servicing a mortgage.
“The era of zero or very low interest rates is over,” said OCBC Bank’s chief economist Selena Ling.
“If interest rates rise too sharply and you don’t see wages commensurate in that level, you may see a pullback in demand as people tighten their belts," she added.
“If businesses don’t see demand going up as fast and can’t pass on costs to consumers, they may delay capital expenditure, wage increases or cut jobs. That’s how you end up in a downcycle.”
But so far, a recession remains a risk further down the road as there is “still enough confidence” in businesses and households to sustain the economic recovery, said Mr Song.
Ms Ling agreed, noting that “an outright recession looks unlikely at this juncture”. Citing how the International Monetary Fund expects global growth for 2022 to be at 3.6 per cent, she added: “That means there’s still some buffer room left to get to negative growth.”
“It is possible that this (forecast) may get trimmed down given the worries we talked about … Whether a recession will happen over the next two years – that’s anybody’s guess because there are so many things that can go wrong,” said Ms Ling, who is also OCBC’s head of treasury and research.
Q: What will happen in Singapore if a global recession comes to pass?
If there is a global recession, Singapore will not be spared.
“It will be a case of global demand for goods and services being cut back because consumers globally start to feel the pinch of inflation and high interest rates,” said Mr Song. “Singapore’s economy, which is very trade-dependent, will feel the impact for sure.”
In such an instance, the first to be hit may likely be the outward-oriented sectors such as manufacturing, wholesale trade, transportation and storage, as well as financial services, said DBS senior economist Irvin Seah.
The impact will gradually filter down to other sectors, hurting workers of all trades, although the extent of the hit also depends on the nature of each recession, economists said. For instance, in 2009, during the global financial crisis, the financial sector bore the brunt of the impact.
Asked whether the recession, if it happens, could be as severe as the recent one brought on by COVID-19, Mr Song said the world had been experiencing “a very long and matured growth cycle” two years ago.
This time round, economies are “still at the beginning of a growth cycle” so the impact “may not be as significant in terms of quantum”.
But it could be a “more drawn-out” downturn depending on the state of global demand, he added.
“Much will really depend on the state of the global economy such as if the Ukraine war continues and sanctions on Russia remain, if COVID-19 flare-ups continue to worsen supply disruptions not just in Asia but in China, more importantly.”
Q: What might happen in Singapore in the near term?
In the short run, Singapore may see slower growth after its economy rebounded by 7.2 per cent last year, but economists are holding out on the possibility of a full-fledged recession.
OCBC’s Ms Ling, for one, still expects the economy to clock 3.5 per cent growth this year, within the official forecast range of 3 to 5 per cent.
Maybank economist Chua Hak Bin said the probability of a recession in Singapore over the next 12 months is only about 6 per cent.
The bank derived this from its recession model, which is based on the spread between the yield on US’ 3-month treasury bills and 10-year notes. This yield spread is one of the widely-watched measures for recession warnings.
Dr Chua added: “We don’t think China’s strict lockdowns or the Ukraine-Russia war is sufficient as a shock to produce a recession in Singapore. An overly aggressive Fed bent on killing inflation may, however, lead to a US recession sometime in 2023 to 2024.”
If the latter happens, Singapore “will likely follow suit and slide into a recession”, he said, noting that the recession scenario probably involves the Fed raising policy interest rates beyond 3.5 per cent.
DBS’ Mr Seah said while there is a “tail risk” of a global recession, it is “not very high” as the world's central banks will likely calibrate their steps when it comes to tightening monetary policies.
“Global central banks will never want to trigger a global recession. This is where calibration of monetary policy comes in,” he added.
With that, the odds of a full-fledged recession, meaning a full-year of negative growth, are low. That said, Singapore faces a higher likelihood of entering a technical recession, defined by economists as two consecutive quarter-on-quarter contractions.
This typically happens when growth is slowing down, Mr Seah explained. Singapore, being a small and open economy, also tends to see more volatile quarter-on-quarter growth due to its exposure to global growth cycles.
“The chances of a technical recession happening next year is not low, based on the current trajectory,” he added.
“First, inflation is getting very high and central banks around the world have only just started to try to tighten policy. By the time we get to next year, monetary conditions will become very tight and this will weigh down on global growth which will in turn affect Singapore.”
Q: What will the uncertain outlook mean for firms and workers?
Dr Chua expects the local job market and wages to still hold up this year, supported by the reopening of the Singapore economy and stricter policies on foreign workers.
Ms Ling also reckons that wage growth will be sustained in the near term, albeit an uneven one that is driven by demand for workers in selected sectors like construction and other fast-growing industries such as financial services and infocomms.
But overall, it will be a “painful” transition for both firms and workers as the economy exits the recovery phase and enters into a “normalisation” period marked by slowing growth and higher inflation, Mr Seah said.
During this period, there is the risk of falling into a “wage-price spiral”, which happens when workers demand higher pay to keep up with inflation thereby prompting companies to raise prices to cover their costs.
Many central banks, including the Monetary Authority of Singapore, have moved to curb the risk with policy tightening, although the effects will take time.
“By the time we reach an equilibrium, workers will see there’s no need to keep demanding for higher wages and the entire economic system starts to cool down,” Mr Seah added. “But we are now in the transition phase so it can be painful for some.”
“Workers will face the pressure of higher cost of living but on the other hand, companies will be reluctant to raise wages because they are worried about rising operating costs and a outlook that may not be that good going forward.”
Still, companies must press on with transformation such as investing in technology. Doing so can boost productivity, which helps to bring down costs in the long run. Workers must also stay relevant and employable by upgrading their skills, the DBS economist said.
“All these will help businesses and workers to be more efficient in meeting the challenges ahead.”