Biannual Macroeconomic Review

MAS Economic Policy Department released its biannual Macroeconomic Review. Highlight from the review are below:

After experiencing its deepest recession since independence, the Singapore economy registered two quarters of double-digit sequential expansion and appears to be in its recovery phase. This was driven, in part, by the easing of global financial conditions and a reversal of the inventory drawdown of the preceding quarters. Accordingly, the GDP growth forecast for 2009 was revised upwards from between -6% and -4% to between -2.5% and -2%.

As we approach 2010, GDP growth will likely shift to a more sustainable trajectory, underpinned by a modest turnaround in final demand in Singapore’s key external markets. Although Asia ex-Japan has recovered strongly, concerns about the resilience of global demand remain, given the lingering weakness in developed economies’ financial sectors and labour markets. After rolling out unprecedented fiscal stimulus packages in response to the financial crisis, central banks and governments worldwide face the challenge of dealing with the consequences of these measures, including elevated public debt and, in some instances, asset-market inflation. Policymakers in the major economies will also have to confront the delicate task of engineering the timely withdrawal of measures introduced earlier and cope with significant uncertainty during the transition towards sustainable private-sector demand-led growth. Of Singapore’s major trading partners, those that are expected to grow below their long-term trends next year account for nearly half of our total exports. Accordingly, domestic growth is likely to be lower compared to previous post-recession periods.

Chapters 1 and 2 of this Review offer an overview of recent developments in the external environment and in the Singapore economy during this volatile period, and include a stylised explanation of the inventory restocking process in Box A. Chapter 1 also traces the Singapore economy’s rebound from the trough which, initially, was driven by the asset market-related and trade-oriented sectors. More recently, growth has broadened to encompass more industries, including tourism-related services.

Compared to past downturns, the number of net job losses thus far has been relatively small. In Chapter 2, we explain how the impact of the recession on the labour market has been cushioned by government initiatives to stem retrenchments, flexible workplace arrangements, and the greater degree of adjustment borne by nominal wages, compared to previous downturns. We also assess current price developments in the domestic economy. Over the first three quarters of 2009, inflation rates for most goods and services eased, with the largest drag coming from fuel & utilities. The moderation in domestic business costs has also kept a lid on consumer prices.

Chapter 3 summarises the outlook for both the external environment and the domestic economy, highlighting the growth prospects for Asia ex-Japan and the G3. While Singapore’s recovery from the downturn may become more broad-based, job creation could, nonetheless, be modest next year, as the relatively small job losses resulting from this downturn means that firms may be carrying surplus labour which they can call upon first to meet any increase in demand. For the rest of 2009 and into 2010, CPI inflation will continue to be dominated by external factors, especially higher oil prices in world markets. It is likely to come in at around 0% in 2009, before rising to 1-2% in 2010. This chapter also includes a box item presenting some results from a credit cycle model, which show that the retraction in domestic non-bank loans during the present recession has been consistent with past economic cycles.

The three Special Features in this Review address the experiences of Asian economies during financial crises and cyclical downturns. Special Feature A examines the impact of global demand on the export performance of Asian economies and finds that their real export growth is still strongly dependent on demand from the developed economies. Moreover, the income effect significantly outweighs the price or exchange rate effect in explaining downturns in exports. Altogether, these findings cast further doubt on the validity of the “decoupling hypothesis”.

Special Feature B is a contribution by the IMF based on its recent study of 33 past recessions in 11 Asian economies since 1980. The depth and duration of these recessions, together with the characteristics of the recoveries, are examined in detail. The results suggest that preserving the stability of the core domestic banking system, and broadening the drivers of the recovery beyond an export-led turnaround to incorporate a stronger role for domestic sources of demand, are crucial for minimising the depth and duration of recessions.

Finally, we conclude this Review with a Special Feature by Professor Michael Spence, Chairman of the Commission on Growth and Development and recipient of the Nobel Prize in Economics in 2001. In this feature entitled, “Financial Sector Dynamics and Post-crisis Challenges for Asia”, Professor Spence identifies the core causes of the present global financial crisis and highlights some important lessons for developing Asian economies.

The next issue of the Review will be released in April 2010.

Economic Policy Department

Monetary Authority of Singapore

29 October 2009

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