Divining growth - How do economists come up with the numbers
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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
SingleSpent 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 -
Whether GDP growth at 1% or 20%, your salary is still the same or drops.
Haiz.
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i thought they pull figures out of their asses?
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Originally posted by the Bear:
i thought they pull figures out of their asses?
There is such a thing as a dice, you know.
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Nah, they used statistics
1 standard deviation, 2 standard deviation...................................
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and not to forget the elusive and dynamic...
GAME THEORY...the economics of strategy and changes....