Road to Recovery: Singapore's Journey through the Global Crisis

3. Impact of Global Economic Crisis on Singapore

3 Impact of Global Economic Crisis on Singapore After the onset of the global economic crisis in 2008, Singapore had become the first East Asian nation to fall into recession. The year-on-year growth rate had plunged from 7.7 per cent in 2007 to 4.5 per cent in H1-2008 (first half of 2008) and further to –9.5 per cent in Q12009 (first quarter of 2009). Although the exposure of Singaporeʼs banks to sub-prime mortgage-linked securities was limited, the recession came mainly through the fall in non-oil exports. This is especially because Singapore has maintained an outward-looking policy over the past decade and has reduced barriers to international trade and investment. Its total trade to GDP ratio of close to 300 per cent is among the highest in the world, thus raising the economyʼs vulnerability to global economic shocks. Transmission of Global Crisis to Singapore There were at least three ways that the global developments were transmitted to the Singapore economy. While the financial sector was affected by the cessation of credit flows, the real economy suffered as the external demand for manufactured goods choked up. In addition, it was the 03฀RtR.indd฀฀฀44 7/5/10฀฀฀2:57:33฀PM Impact of Global Economic Crisis on Singapore 45 working class that suffered from the worst consequences of the economic recession. Impact on the Real Sector Singaporeʼs economy took a severe pounding from global financial sector turmoil and growth slowdown as the countryʼs GDP shrank by an alarming rate of 15.2 per cent and 7.1 per cent quarter-on-quarter (q/q) seasonally adjusted annualized rate (saar) in Q4-2008 and Q1-2009 respectively. Year-on-year, the growth rate fell for three consecutive periods before hitting a low of –9.5 per cent in Q1-2009 (Figure 3.1). FIGURE 3.1 Singapore GDP Growth Rate Fell Sharply Source: CEIC Database, authorʼs calculation. Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 GDP Growth (% y/y) GDP Growth (% q/q, saar) –18 –13 –8 –3 2 7 12 17 % y/y, % q/q SAAR 03฀RtR.indd฀฀฀45 7/5/10฀฀฀2:57:34฀PM 46 Road to Recovery This striking weakness in the Singapore real economy had been largely due to a marked contraction in the manufacturing sector (Figure 3.2). Production was badly depressed on the back of falling global export demand. The two key export destinations, the United States and Europe, grappling with the financial turmoil, still account for more than 33 per cent of the total non-oil exports (Table 3.1). Exports to ASEAN for domestic consumption were badly hit by declining purchasing power. Another factor that contributed to the fall in exports was the nature of cross-border production and trade flows that have developed in the region, particularly in the electronics industry. The fall in end-use demand from FIGURE 3.2 Contraction in Manufacturing Sector Source: CEIC Database, authorʼs calculation. Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 –25 –15 –5 5 15 25 35 % y/y Manufacturing Construction Services 03฀RtR.indd฀฀฀46 7/5/10฀฀฀2:57:34฀PM Impact of Global Economic Crisis on Singapore 47 TABLE 3.1 Market-share of Singapore’s Total Non-oil Exports USA Europe Japan Indonesia Malaysia Thailand Hong Kong Taiwan China 2007 Share (% of total) 15.2 18.2 6.2 6.4 9.3 4.8 6.8 3.9 9.5 Source: Yearbook of Statistics, 2009, Singapore Department of Statistics. 03฀RtR.indd฀฀฀47 7/5/10฀฀฀2:57:35฀PM 48 Road to Recovery the G-3 economies (United States, eurozone, and Japan) resulted in synchronized decline in intermediate goods exports across Asian economies. Moreover, the decline in intra-Asian trade flows was amplified as intermediate goods crossed national borders several times during the production process. Trade financing constraints also affected trade flows in the last quarter of 2008, although the problem was eased quickly. Lastly, Singaporeʼs exports also suffered due to price effect. As the Singapore dollar appreciated more and later depreciated less compared to...