For both H1/H2, use this article as a warm up - read it before going for exam...to speed up your actual exam reading time

Spare the job, save the economy

By: WONG WEI KONG The Business Times 12/11/2008

As economy banks on consumers to spend, DBS move sends wrong signal

AROUND the world, governments are putting in place stimulus packages and reflation policies to help tackle what is widely regarded as the worst global recession since World War II.

From the US and UK to China and other countries, the policies may differ in details, but the theme is similar. Many of these measures are aimed at re-capitalising the banks and lowering the cost of their funding, so as to give them the confidence to lend to one another and to their customers again.

And it is hoped that when there is lending, there will be borrowing and spending, which will rekindle demand and enable firms to produce more goods and hire more people, which will in turn generate income for the economy, to be spent again – the multiplier effect inKeynesian economics. And the key to the success of these policies will be how the consumer responds.

In this equation, the US consumer (who had started the crisis by overborrowing and overspending) will be the most important. Faced with the crisis, US consumers have stopped spending, with dire consequences for export economies like Singapore and China. But the consumer in other countries is important too.

With exports down, domestic consumption will be even more influential, and even for an export-oriented economy like Singapore's, the domestic sector still accounts for a third of GDP. Hence, the caution by Senior Minister and Monetary Authority of Singapore (MAS) chairman Goh Chok Tong last week against the paradox of thrift. Those who do not have enough savings should be "slightly cautious" and spend only on what is necessary, but "if you have sufficient savings and can afford to spend, you should continue to spend on life's little pleasures", he said.

Much focus in the coming months around the world will fall then on repairing consumer confidence and restoring borrowing and spending to normal levels. But there is a major obstacle that may stand in the way of this: the response of companies themselves to the crisis.

Last Friday, the biggest local bank DBS reported that third-quarter 2008 net profit slumped 38 per cent to $379 million compared to a year earlier – its worst quarterly performance since Q4 2005. Along with that, the bank said that it would cut 6 per cent of its workforce by the end of this month, or 900 jobs.

The announcement dealt not just a blow to the morale of the bank's own staff, but also exerted a wider psychological impact. Over the weekend, the DBS retrenchment kept popping up in conversations. "Are things really that bad?", was the constant question. "Things must be, if DBS (still regarded, it has to be said, by many as a government-linked entity) has to do something like this" was the inevitable conclusion. If more companies are to do the same as DBS, then the Singapore consumer is unlikely to play his part in the reflation process. Who'll borrow or spend, even if interest rates are at zero, if they're facing the prospects of a job loss or a big wage cut?

Critical question The issue then is whether Singapore companies are in such a critical condition that job and wage cuts are unavoidable. Only DBS can answer the question whether it was absolutely necessary to cut the 900 jobs. But to put things into perspective, the Q3 2008 profit fall was against a net profit of $610 million for Q3 2007, which was 11 per cent higher than $552 million for Q3 2006, which itself was 32 per cent higher from a restated $419 million for Q3 2005. So the latest dip is against a larger profit base resulting from several years of significant earnings growth. Compared to many US and European banks, DBS seems in far better shape.

The consensus, among economists, is that Singapore businesses generally are much better prepared to weather the storm this turn round than in previous downturns, one reason why off-budget measures to address the crisis are not expected.

The picture for fourth-quarter 2008 earnings, with the full brunt of the crisis felt, will be more negative, but Singapore companies appear on the whole to be relatively healthy. Profits are falling, yes, but these are coming off several years of record earnings in many cases, and few major companies can be said to be tottering into the red.

It must be said that companies should not flinch from cutting jobs or wages if the situation is critical enough to warrant such moves. But too often, job and wage cuts become the default options of management when responding to an economic crisis, even when their companies are on a relatively strong footing. Such measures may please the markets in the short term but may ultimately hurt them and their companies, if they contribute to the further weakening in consumer confidence. Think of it as shooting yourself in the foot.