Thursday, October 14, 2010

Is Singapore In A Depression Or Spectacular Boom?

Singapore is usually the first to report preliminary growth numbers, and that was the case this quarter too. Yet depending on what number you looked at, it could have either suggested that Singapore is in a depression or that it is enjoying a spectacular boom.

If you for example go to the statistics Singapore web page you can see in the center of the page the news that GDP contracted by an annualized rate of 19.8%, while in the left side bar you can see that GDP is up by 10.3%.

This is bound to lead to confusion for people who haven't been regular readers of this blog for some time or learned these distinctions some other way. In short, the 19.8% contraction number expressed growth in the American way, while the 10.3% growth number expressed growth in the Chinese way. Expressed in the European way, there was a 5.4% contraction. In case you are unaware of it, see my previous explanation of the difference between the American, European and Chinese way of expressing growth.

What then can be learned from this? First of all, that quarterly change in output in Singapore is even more volatile than in other countries. And secondly, given the fact that quarterly change is unusually volatile in Singapore, it makes more sense to look at the yearly change (the "Chinese" way of expressing growth), and the answer to the question of how Singapore's economy is performing is that it is doing great, and that the quarterly contraction simply reflected normal (for Singapore) volatility.

And thirdly, it illustrates given the second point, just how misleading the American way of expressing growth can be. The American way of expressing growth is based on the implicit assumption that quarterly growth will stay constant during four quarters. Yet that has clearly not been the case in Singapore where growth expressed in the American way was -1% in the fourth quarter of 2009, 45.9% in the first quarter of 2010, 27.3% in the second quarter of 2010 and then -19.8% during the third quarter of 2010.

The quarterly variations is less extreme in other countries, but very big too, and since this way of expressing growth gives people the misleading impression that output in for example Singapore actually rose by 45.9% in the first quarter and contracted by 19.8% in the third quarter, it is bound to be misleading

In a way the Chinese way of expressing growth is the best since it first of all expresses actual changes and also smoothes out quarterly volatility, but it has the drawback of missing or underestimating turning points The European way also uses actual numbers and directly spots turning points, though compared to the Chinese way it is bound to reflect erratic short-term fluctuations. The American way of expressing growth is therefore the worst way. However, because other financial news and commentary sites will use it and because many readers are used to it, I will usually in the case of countries with statistics bureaus that use it (primarily the United States) use it too.