However, recently some quarters of the investment community have expressed doubts about whether private consumption will hold up in Singapore. We believe their concerns are misplaced. Private consumption is the largest component of GDP in Singapore, as in almost every other country. Many market participants have expressed concerns that sluggish private consumption will drive the present downswing, believing that households are likely to decrease consumption massively as they turn pessimistic about the growth outlook. We disagree with this assessment from both a theoretical and an empirical perspective.
Private consumption is a sluggish pro-cyclical component.
Evidence on business cycles in major OECD countries is well documented. Typically, countries that run positive net exports will experience shrinkage in net exports, but countries that run negative net exports could see a further deterioration in their negative net exports. Private consumption normally remains quite stable in a downswing, as the bulk of household expenditures cannot be lowered in the short term, and permanent income expectations remain steady. Government can act and typically will act in a counter-cyclical way through spending and taxes, while households typically do not react a great deal to short swings in business cycles. Likewise, in a typical business upswing, re-stocking and a pickup in business investment leads a recovery.