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

5. Singapore's Economic Perspective and Future Policy Directions

5 Singapore’s Economic Perspective and Future Policy Directions Being a small and open economy, Singapore is susceptible to external shocks, but by the same measure, the city state tends to bounce back faster and stronger than many other regional economies. Thus, following the global economic recovery, Singapore also catapulted itself out of recession in the third quarter of 2009. The economy expanded by 0.6 per cent, the first expansion after three straight quarters of contraction. The growth was driven by expansion in the electronics manufacturing sector and improvements in the trade-related and tourism sectors on the back of a gradual stabilization in global economic conditions. But this fast turnaround may not be without hiccups. Weak household balance sheets and persistently high unemployment, especially in the United States, might weigh down consumer demand in Singaporeʼs key export markets. Although external demand will continue to grow, it will be at a sluggish pace. Growth momentum in the second half of 2010 may also slow down as the effects of global fiscal stimulus measures and inventory restocking wane. The city state may experience uneven recovery 05฀RtR.indd฀฀฀97 7/5/10฀฀฀2:59:06฀PM 98 Road to Recovery across sectors. According to the Ministry of Trade and Industry of Singapore, the economy is expected to grow by 4.5–6.5 per cent in 2010, after shrinking by 2.0 per cent in 2009. World Economic Outlook The global economic recovery seems to be well under way. Businesses and consumers are slowly realizing that worst-case scenarios are almost over and are adjusting their consumption, investment, and hiring behaviour according to a more benign economic behaviour. Most importantly, businesses are no longer cutting on their inventories. The advanced economies, which were hit particularly hard by the financial crises and the collapse in world trade, are showing signs of stabilization, driven mainly by an unprecedented public policy response. The rebound in emerging economies is being led by a resurgence of Asia, fuelled by policy stimulus and a turn in the global destocking activities. This was also reflected in the financial markets as investorsʼ risk aversion declined, portfolio flows recovered, and stock prices rallied. For example, from its trough in March 2009 to the end of December 2009, the S&P 500, the DJ Euro Stoxx 50, and the MSCI Emerging Market rose 60 per cent, 65 per cent, and 108 per cent respectively. But the pace of recovery both in economic activities and the financial market is still very nascent and remains far below the pre-crisis level. The private sector in many advanced economies is still over-stretched. U.S. households remain highly indebted and household balance-sheet problems remain important in the 05฀RtR.indd฀฀฀98 7/5/10฀฀฀2:59:06฀PM Singaporeʼs Economic Perspective and Future Policy Directions 99 United Kingdom, Spain, and Ireland. As these imbalances may come to the fore only by late 2010, there could be a slowdown in the United States and some other advanced economies in early 2011. However, this would entail only a softening of growth rather than a renewed widespread GDP deceleration. That said, according to the forecast released by the IMF in January 2010 (Table 5.1): • The world economy has been estimated to contract by 0.8 per cent in 2009, far below the 4.1 per cent growth rate achieved during 2007–8, prior to the crisis. Global activity is likely to expand by about 3.9 per cent in 2010 and another 4.3 per cent in 2011. • As regards the advanced economies, output contracted by 3.2 per cent in 2009 (as against an expansion of 0.5 per cent in 2008) on householdsʼ loss of confidence in the real and the financial economy. Annual growth is projected to recover gradually in 2010 and 2011 to about 2.1 per cent and 2.4 per cent respectively, with unemployment continuing to rise for 2010. • The growth rates in the emerging and developing economies were forecast to reach around 6.1 per cent in 2010–11, up from 2.1 per cent in 2009. While Chinaʼs growth is projected to rise from 8.7 per cent in 2009 to 9.8 per cent in 2010–11, growth in India is placed at 7.8 per cent for 2010 (vis-à-vis 5.6 per cent in 2009) by the IMF...