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Fear concerning the deadly severe acute respiratory syndrome (SARS) virus has emerged as a major threat to the economies of Singapore and Hong Kong. Even under the relatively optimistic assumption that the virus is contained within the next three months, and that exports grow in the aftermath of the war in Iraq, both economies will now do well to escape an outright contraction in 2003.
We at MMS International now project flat gross domestic product growth for Singapore in 2003, vs. a forecast of 3.5% growth before the SARS outbreak became evident. And Hong Kong's GDP should contract by 0.5% in 2003, vs. a pre-SARS forecast of a 3% gain. Both economies are expected to show a contraction in GDP for the second quarter -- which we assume will represent the peak of the crisis -- but both should avoid an outright recession, if growth picks up later in 2003.
No doubt public fears are exaggerated, but the fallout is evident. The burden of the outbreak on these travel-dependent commercial hubs is highlighted by a recent Singapore report that visitor arrivals in the first week of April were down 56% from a year earlier. In both cities, the huge services sector is bearing the brunt of the SARS scare. Especially hard-hit: Tourist-dependent sectors, such as the hotel, restaurant, and transport industries, along with the broader retailing sector.
OPAQUE DATA. In the case of Singapore, we trimmed our projection for full-year 2003 growth by a percentage point in mid-April in the wake of a weaker-than-expected preliminary estimate for first-quarter GDP growth of 1.5% over the year-earlier period. This figure was boosted by 5.5% year-over-year growth in manufacturing, but it also revealed a disappointing 0.7% gain in the services sector.
This was based on data available in January and February, and presumably included softer assumptions for March, though SARS wasn't detected until mid-March. Export-driven manufacturing began 2003 on a firm note, with nonoil domestic exports posting a solid 20% gain.
China, where the SARS outbreak began last November, remains a major source of uncertainty. The reported 9% year-over-year gain in first-quarter GDP hardly suggests a loss of momentum, though doubts about the data's reliability are only heightened by criticism of China's lack of transparency regarding SARS. Chinese trade remains an important locomotive for the regional economy. The country's interface with Hong Kong is pivotal, after Chinese residents provided key support to the region's tourism in 2002.
GOOD NEWS. Ironically, SARS is taking its toll just as the fighting in Iraq winds down, which should be lifting a major cloud that had been hanging over the global economy for the past two quarters. There's no question that recent data from the U.S. and Europe have displayed a softer tone.
At least in the U.S., though, first-quarter GDP growth appears to be holding up much better than some feared (our estimate is for a 3% rise). And oil prices have fallen $10 a barrel from peak March levels, which appears to lessen the chances that an energy spike will drag down the world economy. Finally, consumer and business sentiment has shown signs of rebounding from recent steep dips.
Faster economic growth in the U.S. will be vital to Asia's future prospects. A U.S. upturn should help sustain global demand, thus supporting renewed growth in Asian exports. Data available from Asia thus far in 2003 generally show exports and production hovering near fourth-quarter levels, after finishing 2002 near their highest levels for the year. This also applies to Japan, where GDP posted an unexpected fourth consecutive increase in the fourth quarter, before trending sideways so far in 2003.
DAMAGE CONTAINMENT. It's worth remembering that the world economy has shown resilience in the face of other recent shocks. That was highlighted in the aftermath of the September 11 terrorist attacks in New York and Washington, which most forecasters had expected to exert a notable drag upon global growth. Instead, the impact was largely limited to a sharp downturn in worldwide travel (which SARS is now hitting again).
We at MMS are optimistically assuming that SARS will be controlled soon, and that the economic impact, as with the September 11 attacks, will be concentrated in the travel-sensitive sectors. For suddenly vulnerable Asian economies -- especially Hong Kong and Singapore -- the hope is that the economic damage, like the virus, can be contained.
Singapore-based Cohen is an economic forecaster for MMS International
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