Are we in a Schrodinger's recession? Understanding the dual reality of recovery and recession In Singapore

Everyone's been walking on a tightrope. Nobody is certain if we are truly in a recession yet even though we have been bracing for it. When you look at the intricacies of market trends, consumer behaviour, and government policies, some signs leaned towards a looming recession. On the other hand, we see glimmers of growth and recovery in other sectors. 

Now, here's the million-dollar question. Are we in a recession? Everyone wants to know how they should plan for their finances and purchases shortly. Truthfully, we can't give you a direct answer as it hinges on forthcoming data. The ones who call it are the Business Cycle Dating Committee from the National Bureau of Economic Research.

First, let's find out more about the new term you'll learn today — Schrodinger's Recession. 

1. What is schrodinger's recession? A quantum view on the US economy

Remember Schrödinger's Cat? The poor kitten in the box could be dead or alive. Either way, we wouldn't know the answer until we opened the box. Unlike past recessions, where the situations are clear-cut; our economy appears to be oscillating between a recession and recovery. 

Is it going to be business as usual then? Should we be more conservative in our investment plans or purchases?

• Economic Ties: Singapore's economy is tightly interwoven with that of the US. In the economic sense, our fortunes are often in sync with the world's largest economy's rise and fall. The United States imports from Singapore were US$32.14 billion in 2022, making it one of our most important trading partners. Any significant fluctuations they experience can impact us negatively on the home ground.
• Reading the Recession Signs:  Based on 150 years of recession history, the Bank of America mentioned a recession is imminent with the yield curve steepening and tighter credit conditions. Two out of three factors have manifested themselves. The final harbinger will be when the Feds are forced to cut interest rates.

Elsewhere, US manufacturing, which accounts for 11.3 per cent of the economy, contracted for a seventh consecutive month as new orders plummet amid higher interest rates.

• Counter Signs: Unemployment is on a low with the US on a job-creation spree, adding about 440,000 jobs each month in the first half of 2023. Unemployment rates are at a record low in half of US states. It shows a strong demand in the domestic labour market. Also, many businesses are reluctant to lay off workers because it's challenging to find quality ones to stay.

Meanwhile, the US experienced GDP growth of two per cent in the first quarter, up from 1.3per cent. This was largely supported by both consumer expenditures and exports being stronger than expected.

Consumer spending shows no signs of slowing despite inflation hikes. Spending power remains high for mid-upper income individuals. More consumers are expected to spend on big-ticket items (e.g. houses, cars) in the next 6 months. 

Evidently from the signs, the US economy can swing either way. Its current state of flux makes it antsy for investors and consumers. If a recession is truly at our doors, these are the signs to watch.

2. Key signs of an impending recession

Coining a recession is not as straightforward as many would think. While a recession is commonly defined by two consecutive negative quarters of GDP growth, there's no hard rule on the definition in the US Till the National Bureau of Economic Research declares openly, here are early warning signs you should note:

• Negative GDP Growth
• Higher Unemployment
• Inverted Yield Curve
• Tighter Credit Conditions
• Underperforming Housing Market

2.1. Negative GDP growth

The Gross Domestic Product (GDP) serves as the economic heartbeat of a nation, encompassing the total worth of produced goods and services. In 2023, the US's GDP, however, displayed a concerning rhythm-a sequential shrinkage suggesting a potential recession.

The landscape isn't homogenous though. Despite an overall 1.6 per cent GDP dip in Q1, we observed a beacon of resilience in some sectors. Consumer spending, business investments, and housing exhibited positive growth, possibly backed by the strong job market and accelerated job growth observed in the first half of 2023.

Should GDP growth take a turn for the worst over consecutive quarters, we can expect a recession to be at hand. 

2.2. High unemployment rates

Unemployment is a major tracker for recession. With more people losing their jobs, they are forced to cut back on spending. This ripple effect can lead to less profitable businesses, thus triggering a recession.

While the US maintains a historically low unemployment rate of 3.7 per cent, Morgan Stanley economists cautioned against premature optimism. They suggest a slight uptick in unemployment could foreshadow a recession. Chief Economist Jan Hatzius from Goldman Sachs noted that the economy might decelerate in upcoming quarters due to slower real disposable personal income growth and reduced loans. 

2.3. Inverted yield curve

Traditionally, a yield curve steepening after inversion tends to precede significant dips in the stock market. The yield curve measures the difference between short-term and long-term US Treasury rates. 

Currently, short-term rates are yielding more than their long-term counterparts. This is atypical as investors usually earn more interest when they lend out their money for longer periods. Since 1921, 80 per cent of yield curve inversions preceded recessionary bear markets. 

When the yield curve steepens and un-inverts, it's generally a sign that recession may be mere months away. Today, the 2-year and 10-year yield curve inversion has steepened from -1.07 per cent at its peak to -0.54 per cent.

2.4. Tighter credit conditions

Here's a general rule of thumb: lending standards never get so tight without leading to or coinciding with a recession. You will observe that credit conditions generally turn negative a year before a recessionary low in the market. Credit conditions could be tightened further to combat inflation hikes and consumer spending. Beyond that, banks may be more conservative in their lending, reeling from the aftereffects of the collapse of the Silicon Valley bank.

2.5. Underperforming housing market

Even though the housing market is not as vital compared to the other factors of an impending recession, the dramatic swings in the sector can say a lot. While a housing boom typically brings about incremental growth, a slack one can mean significant spending cuts. Housing prices on the West Coast are starting to fall after last year’s record highs. A collapse in housing activity could trigger a recession.

3. Counter evidence to a recession's grip

In the face of seemingly ominous signs of an impending recession, it’s wise to consider the contrary evidence as well. The steady GDP growth, aggressive Fed action, and surprisingly low unemployment rate give us hope that things are not as bad as it seems.

3.1. Steady GDP growth

The US economy is more resilient than most would expect. Despite forecasts of an economic slowdown, a 3.2 per cent growth rate was recorded in the first quarter of 2023, mirroring the rate in the last quarter of 2022. 

Big tech companies, like Microsoft and Nvidia, make new strides with the generative AI revolution, contributing to a 34 per cent return in just four months of 2023. Simultaneously, Biden's $2.6 trillion budget for entitlement programs created substantial fiscal stimulus. 

3.2. Upward trajectory of the stock market

The S&P 500 Index's rise of six per cent year-to-date and a nearly 16 per cent jump from its January low offer strong counter-evidence against a looming recession. Dow Jones rises nearly 200 points, extending its victory run to 12 days, it's the longest winning streak since 2017.

Wall Street has been swimming in good news as 130 S&P 500 companies reported their second-quarter earnings thus far. Of these, 79 per cent exceeded analyst expectations. This demonstrates robust investor confidence-a crucial bulwark against economic downturns.

4. The impact of uncertainty on Singapore's economy

4.1. Effects on the local economy

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Singapore's positioning as an economic hub in Asia also meant that the fate of our economy is tied to that of global economies. The city-state's vulnerability arises from its high reliance on exports and trade services, with a staggering trade-to-GDP ratio of 338 per cent since 2021. 

For now, consumer confidence is high despite inflation. As long as US consumers continue to spend on overseas imports, our economy will be in a good place. Although, this is held in a delicate balance. The moment the US economy plunges into recession, we are likely to follow suit.

Moreover, the economic uncertainty has big tech cutting their costs and reorienting their business strategy to brace for the impending recession. Facebook recently had a 2nd round of layoffs and ride-hailing platform, Grab, laid off 1,000 employees-their biggest retrenchment yet. Unemployment is expected to slowly creep up as nearly 90 per cent of Singapore CEOs are contemplating a hiring freeze over the next six months.

Hence, Singapore is finding new ways to reposition itself in an evolving investment landscape. As a leading hub for family offices, we attracted private wealth management advisory firms, such as Dyson's Weybourne Group, offering stable investments and job creation opportunities to keep our economy afloat. 

4.2. Effects on individuals

Impacted by global conflicts and financial fluctuations, local residents are feeling the pinch. Increased inflation and interest rates led to elevated prices for daily essentials with an average inflation of 4.2 per cent, much higher than the Fed's goal of two per cent. 

On a loan front, rate hikes meant higher interest rates and making house repayments more expensive. Previously, loan applicants could apply for fixed interest rates at the extremely low one per cent. As the term lapses, individuals are now expected to pay an interest rate to quadruple the amount. Individuals may find it hard to service their repayments and default on their loans.

As the job market becomes more volatile, individuals are likely to be more conservative in their spending. Due to potential economic adversities, nearly 64 per cent of individuals in the States are cutting costs, 50 per cent are building savings, and 41 per cent are delaying large expenses. We expect the same effects here in Singapore with a more frugal lifestyle shortly.

4.3. Effects on businesses

When rumours of a recession lurk by, investors' confidence is dampened. Having its ninth consecutive month of decline, Singapore's factory output fell 4.9 per cent in June. The Singapore Economic Development Board's data showed a fall across all industry clusters, except transport engineering. Total output fell by 5.2 per cent.

While industries faced a contraction, consumer spending shows no sign of stopping. With the barrage of concerts, festivals and celebrity appearances packed throughout the year,  it brought in 2.9 million tourists in Q1 2023. Retailers and hotel chains in the service sector are enjoying the influx of tourist spending and thriving iamidrising costs. 

So, are we in a schrodinger's recession?

Much like Schrödinger's infamous cat, uncertainty is the only assurance until more conclusive data proves otherwise. As the economy is much more multi-layered and complex, we encourage you to always be on the lookout for warning signs.

It's important to stay informed, critically evaluate data, and consider multiple perspectives when assessing the state of the economy. The last thing you want to do is to respond and manage your finances based on a single narrative. Only to regret it later, when reality shows otherwise. 

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