Why Singapore is in a recession and still expected to be in one come 2009?
Singapore CBD - Source: HamsterUnited
Manufacturing and financial business services are the two major industries powering the Singapore’s economy. They account for 48% (2000 figures) of our Gross Domestic Product (GDP). The global financial industry, as many have read, is in deep trouble. So there goes our financial business services engine.
On 10 Oct 2008, Singapore became the first Asian country to be in a technical recession due to falling demand for our manufacturing and “repackaged” exports. (Telegraph)
A technical recession is defined as a fall in economic output for two consecutive quarters.
Besides the economy’s twin engines, our main industries are chemicals, oil drilling equipment, petroleum refining, rubber processing and rubber products, processed food and beverages, ship repair, offshore platform construction, life sciences and entrepot trade. All of which are hit by the global credit crunch in one way or another.
Unfortunately, we do not have a large domestic market such as China or India where the global economic downturn do not affect them as strongly as to Singapore. Even then, China and India are cracking under the weight of mostly western contagion (The Economist).
Using the GDP function:
Y = C + I + G + NX
Where,
Y=GDP
C=Private Consumption
I=Business Investment
G=Government Spending
NX=Net Export (Exports – Imports)
While recognising that in the current domestic economy, NX, C and I are both decreasing due to the global economic gloom. Our GDP growth is set to be very low or even in the negative.
The only way (as seen from this simple function) is to increase government spending (i.e. pursuing Keynesian demand management approach). On 6 Nov 2008, SM Goh Chok Tong said that the government will be pursuing an expansionary fiscal policy in the coming national budget 2009. The Singapore government is expecting to either spend more or collect less tax or both. (CNA).
However, we should expect to continue experiencing a recession come 2009, as the expansionary fiscal policy will need time to jump-start the multiplier effect and stimulate the aggregate demand.
My guess is that we’ll only see the improvement in the economic outlook in early-mid 2010.
