SWISS bank UBS expects Singapore's economy to shrink by 0.5 per cent next year but to bounce back with growth of 4 per cent in 2010.
Its assumption rests on expectations that the United States and Europe stage a moderate recovery at the end of next year.
Mr Thomas Kaegi, senior economist at UBS Wealth Management Research, said that while the US faces its worst recession in 25 years, fiscal and monetary stimulus measures will help offset the sharp decline in private consumption and boost the economy.
'The recovery we forecast for the US in 2010 is not a sharp re-acceleration by historical standards,' said Mr Kaegi at the bank's global outlook briefing last Friday.
There will be a 'bottoming out' in some hard-hit areas of the US economy, such as capital expenditures and commercial real estate spending, while other components will stage only a 'moderate turnaround'.
Mr Kaegi predicted more pain in the near term for Singapore. 'The labour market will deteriorate and this will weigh on consumer spending and investment spending. Next year, we'll see correction in construction spending that has held up quite well,' he said.
He also spoke about the spectre of deflation: 'For Singapore so far, inflation has come off very slowly, much slower than we've expected. However, it might well be that we're going to see some months of negative inflation going into next year.'
Fears of deflation are rising globally, as the economic slowdown and the threat of a deepening recession hit the cost of raw materials.
And it might be worthwhile taking note of deflation, industry watchers say, because it encourages households and companies to delay purchases in anticipation that prices will fall. This, in turn, hurts economic growth. Deflation also makes it more expensive for debtors to pay off their loans.
A Morgan Stanley report said the 'open nature' of Singapore's economy makes it most vulnerable to build-up of slack, and hence lower pricing power.
'In the 1998 and 2001 recessions, when GDP growth was minus 1.4 per cent and minus 2.4 per cent respectively, there were three to four quarters of deflation. We expect negative inflation towards the second half of 2009,' it noted.
Mr Kaegi does not believe Singapore will be entrenched in Japanese-style deflation, where prices were static or falling despite the ultra-low cost of borrowing. Japan's decade-long deflation dented the national appetite for risk and investment.
This article was first published in The Straits Times on December 15, 2008.
