3.5% 5% 1% 0.5%
Divining growth
How do economists come up with the
numbers
Aaron Low
Economics Correspondent
At first glance it looks like guesswork - well, educated
guesswork - but economists who release their quarterly forecasts
for the Singapore economy know it is far more demanding than
that.
Coming up with that one growth number is just the final
act in a lengthy, brain-numbing process of data analysis and number
crunching that is as much a test of human endurance as computer
power.
Some get it right, others shoot wide off the mark;
reputations are enhanced or they take a knock until the next round
gives the economists a chance to get it right.
Distilling the oceans of data to get an accurate growth
prediction is no mean feat in any economy, but it is particularly
testing in Singapore. This is one of the most open economies in the
world, exposed to all manner of outside influences and pressures
that lie outside the control of the government or private
enterprise.
For instance, Singapore's economy is driven largely by
its exports to Europe, the United States and China. Should those
economies tank, Singapore will be greatly affected.
The economy is also influenced by many other factors,
such as the price of oil, which can spike inflation here, and the
movement of funds from investors, which may fuel the price of
assets here.
Combine that with the pharmaceutical industry, a major
player here but one that is so volatile that economists often have
a hard time getting their fingers firmly on the pulse of the
economy.
Take the latest survey of 21 economists. Their forecasts
for growth this year varied widely, from as low as 0 per cent to as
high as 6 per cent. The official government forecast is between 1
per cent and 3 per cent growth.
Private sector forecasters usually release their
predictions for the following quarter, before the official numbers
are out. This survey is closely watched by investors as they give
fair warning about the health of the economy.
One big reason for the variance in the forecasts is that
economists have different levels of familiarity with how the
economy functions, says Citigroup economist Kit Wei Zheng.
Most economists will naturally pay attention to exports
as they account for more than three times overall gross domestic
product. This means that when export numbers, which come out every
month, move, economists tend to also adjust their forecasts.
"But that's just one part of the puzzle. You have to pay
attention to what's going on in the economy itself," he says.
For instance, one large domestic factor is politics.
Mr Kit notes that five years ago, there was a far
stronger emphasis on growth than now, following the General
Election last year.
He says it is quite clear that there is a shift from just
focusing on growth to wealth redistribution.
But the move to tighten the flow of foreign manpower
leads to other issues cropping up, such as the 'trade-off' between
growth and inflation, he says.
In other words, with tighter supply constraints, trying
to grow faster will result in inflation.
"Previously you could grow at 3 per cent and have
inflation at zero maybe. But now, this year we grow at 3 per cent
and inflation is at 5 per cent."
For Barclays Capital economist Leong Wai Ho, getting the
numbers right is not as important as getting the overall story
correct.
He says his value to his clients is telling them what
lies behind the numbers, what the real story is and what
assumptions he has taken.
"Anyone can make an accurate prediction about exports but
did they base their reading of numbers on the right assumptions?
Did they read the correct signs and analyse the situation?" he
says.
Apart from studying the numbers, CIMB economist Song Seng
Wun takes a different approach.
The veteran economist, who has spent 24 years studying
the Singapore economy, likes to get out on the shop floor, checking
activity at factories, watching consumer spending and checking if
the taxi queues are still long.
"Once in a while, we will drive to Tuas to see if the
pharmaceutical firms are adding more capacity to their factories,
since we don't get to hear from them or collect data," he says.
And yes there is "friendly competition" among the group
of local economists who track the economy and issue their
forecasts, says Mr Kit.
But he adds: "It's healthy competition. We don't wave our
correct predictions in front of those who get it wrong, of
course."
THE VETERAN
He finds value in talking to cab
drivers
Mr Song pays close attention to taxi stand lines and
crowds at restaurants to gauge consumer confidence. -- ST PHOTO:
TED CHEN
Song Seng Wun, 52
Married with two children, one 13, the other 16.
Joined CIMB in 1988, studying macro-trends of the Singapore
economy.
There are about a dozen fish, two frogs, several plants, and two
empty cages, one that used to house a bird and another a possum, in
Mr Song Seng Wun's Raffles Place office.
"It's a bit of a jungle out here in Raffles Place," the
economist from Sarawak said with a wry smile.
The economist, known for wearing suspenders and hats, is
one of Singapore's most well-respected private sector economists,
one known for his eye for the unconventional.
He is married to a Singaporean, and has two teenage
children.
He refuses to drive in Singapore because "the numerous
traffic lights and bad drivers irritate me" and loves taxi drivers
as "they always have a story to tell".
"Also it's just more convenient to take the bus and MRT
trains to get to my workplace."
Going around on public transport and talking to drivers
also allow him to tap into other indicators of the economy, which
has been increasingly difficult to measure, compared with 10 years
ago.
This is mostly because the pharmaceutical industry, which
he calls a "black box", does not openly or regularly reveal its
production levels or sales.
Yet the industry can significantly alter the overall
gross domestic product figure.
"Last year, without drugs, the economy probably expanded
at about 2.5 per cent. This means that drugs accounted for 2.4
percentage points of total growth, which was 4.9 per cent last
year," he says.
Instead he pays close attention to taxi stand lines and
crowds at restaurants to gauge consumer confidence.
He also closely tracks the Chinese economy and the
performance of that economy has become an important driver of
growth for the regional economies here.
Regardless of the difficulty in getting the numbers right
all the time, he is happy with his record of predictions over the
years, saying that it is "not bad".
Says Mr Song: "I don't know the exact hit rate but I do
still have a job, so it can't be that bad."
THE OPTIMIST
'Big picture matters more than
numbers'
Mr Leong expects growth in Singapore to slow down but
believes that the economy will still grow at about 3 per cent. --
ST PHOTO: TERRENCE LIM FOR THE SUNDAY TIMES
Leong Wai Ho, 41
Married with a son, eight, and a daughter, four.
Started as an industry analyst at Fuji Bank in 1994 before
moving to the Trade and Industry Ministry as an economist. Now a
regional economist with Barclays Capital.
Mr Leong Wai Hois not too worried about getting the exact
forecast numbers correct.
He believes what is more important is to take a step back
and look at the big picture.
For instance, between January and April, Singapore saw
its exports to troubled Greece rise while exports to Germany, the
best performing euro zone economy, fell.
The real story, Mr Leong found out, was that exports to
Greece were worth just $200 million while those to Germany crossed
$2 billion.
What happened was probably an anomaly: A big shipment of
goods to Greece, such as a ship or a tanker, was delivered, making
it seem as if demand in Greece had gone up. "The real story was,
however, the slowdown in Germany, which is the bigger concern," he
says.
Because Singapore does so much trade with Germany, a
slowdown in exports is something Singapore should be worried about,
he says.
He expects growth in Singapore to slow down but believes
that the economy will still grow at about 3 per cent, which is at
the higher end of the official forecast of between 1 per cent and 3
per cent.
He is also positive on the future of the country, noting
that the economy has survived several shocks such as the dot.com
bust, Sars, and the financial crisis.
The economy has also transformed itself from a
manufacturing base to a services-led economy that is becoming
increasingly powered by regional demand.
"Tourism, for example, is now led by Asians travelling on
budget airlines," he says.
The types of jobs too are rapidly evolving. Factory
worker jobs are being replaced by skilled jobs such as precision
engineers, croupiers and sous chefs, he notes.
"We also have strong fiscal reserves to help buffer
negative shocks."
Growing through productivity gains, which is what the
Government has been pushing, means that wages will rise on a
sustainable basis, he adds.
"Am I an optimist? I am hopeful. We may not be able to
identify the challenges ahead and that's scary," he says.
"But I believe we have what it takes to thrive and
prosper in the new economy."
THE DATA CRUNCHER
Hard work needed to get forecasts
right
Mr Kit collects as much economic data as he can from
official sources, industry associations and contacts within his
bank. -- ST PHOTO: TED CHEN
Kit Wei Zheng, 36
Single
Spent five years at the Monetary Authority of Singapore, before
joining Citigroup in 2007.
There is no magic formula to getting economic forecasts right, just
plenty of hard work, says Citigroup's Kit Wei Zheng.
For a start, he collects as much data as he can on the
economy from official sources, industry associations and contacts
within the bank.
All of this goes into his "giant spreadsheet" which, when
loaded, sometimes crashes his computer.
"I spent the first two years of my life at Citi building
the database, working 15 hours a day," he says.
But collecting data is just one piece of the puzzle. To
be able to make reasonable conclusions about the information, Mr
Kit says that he puts all of the data into the context of
Singapore's domestic economy, politics and society.
"Getting information is not the problem, too much
information is the problem," he says.
He notes that many economists tend to start looking at
the external economy before making extrapolations about the
Singapore economy.
But if they ignore what is happening inside Singapore's
economy, such as consumer sentiment and the potential for large
swings in the pharmaceutcal industry output, they may get their
forecasts wrong.
Asked if he would elaborate on the specifics of how he
derives his forecasts, he declines, saying "it's a trade
secret".
He does, however, believe that forecasting has become
trickier especially in the past five years, with much higher
volatility, shorter business cycles and the changing political
landscape.
As an economist, he also feels he has a duty to
contribute to public discussions on economic policy. For instance,
he has criticised Singapore's economic model of relying on
multinational corporations (MNCs) to drive the economy.
He says that this had led to workers having a smaller
piece of economic growth, as large chunks of the growth go towards
the profits of MNCs which get expatriated back to their home
countries.
He has also said that the current high inflation rate is
partly due to the result of the liberal immigration policy between
2004 and 2007.
"So the economy is in a painful transition, and at the
early stage of rolling back the excesses from that growth era," he
adds.
THE POLICY ANALYST
He tracks manufacturing, govt
policies
Mr Seah is confident that Singapore can record 3.5 per cent
growth this year. Part of his optimism stems from the fact that the
first-quarter numbers were much better than expected. -- PHOTO:
TERRENCE LIM FOR THE SUNDAY TIMES
Irvin Seah, 37
Married with twins, aged two.
Started his career as a Trade and Industry Ministry economist
before moving to DBS in 2007.
Like many economists, Mr Irvin Seah studiously tracks the
manufacturing output of Singapore's economy as it is closely tied
to exports, the lifeblood of the Republic's open economy.
The manufacturing sector is a good proxy for the overall
health of the Singapore economy, he says.
For one thing, a chunk of services, such as financial
services and transport, directly services manufacturers.
"So in many ways. the services sector is tied to the
manufacturing sector. When the manufacturing sector, which is
mainly geared towards exports, gets affected, it is likely the rest
of the economy will also get hit."
But instead of just scrutinising Singapore's export data,
he pays close attention to the country's main export markets, such
as the United States and China. "If the factory managers are saying
they want to produce more, they will import more, which will lift
our factories," says Mr Seah.
Although these major markets do not seem to be doing
particularly well now, he is still confident that Singapore can
record 3.5 per cent growth this year, which is above the official
forecast of between 1 per cent and 3 per cent.
Part of his optimism stems from the fact that the
first-quarter number was much better than expected, coming in at
1.6 per cent against the zero per cent many economists were
expecting.
"From an accounting perspective, the first-quarter
numbers are always important because they set the base for the
whole year's growth," he says.
"Since the first-quarter numbers were solid, even though
the rest of the year will see slower growth, we should still grow
at 3.5 per cent."
Mr Seah also tracks government policies, which can change
the trajectory of the economy. Of the current approach to solving
the manpower crunch, he says: "Why not just tighten quotas as
opposed to raising the costs of hiring foreign workers?" In the
current approach, where foreign worker levies are raised, costs
simply rise for the firms and the push to swop labour for
technology may not be strong enough, he says.
Top News, The Straits Times, The Sunday Times, June 24 2012, Pg
10-11
