2020 has not been the greatest of years. We have had the Australian wildfires, the aeroplane crashes in Iran and Pakistan and the Covid-19 crisis.
And to top it all off, Singapore has entered a technical recession.
FYI: A technical recession is defined as two consecutive quarters of quarter-on-quarter contraction.
According to the Ministry of Trade and Industry (MTI)’s advance estimates published this Tuesday (14 Jul):
Singapore’s Gross Domestic Product (GDP) shrunk by 12.6 per cent year-on-year in the second quarter of 2020 (Q2 2020). On a seasonally-adjusted annualised quarter on quarter basis, the GDP shrunk by 41.2 per cent.
In other words, Singapore’s economy has contracted collectively for two quarters. This data is important, as it provides the first holistic measure of how the Circuit Breaker measures have impacted Singapore’s economy.
MTI attributes this drop in GDP and the hit to Singapore’s economy to the Circuit Breaker measures that were implemented to stem the spread of Covid-19 in Singapore.
But, how to make sense of it all?
We turn to a man who has warmed the cockles of many hearts in Singapore, Singaporean economist and Member of Parliament (MP) Jamus Lim.
On top of being a Worker’s Party member, Jamus is an associate professor of economics at École Supérieure des Sciences Économiques et Commerciales (ESSEC) B usiness School.
On 18 May 2020, Jamus spoke at a webinar organised by ESSEC entitled ‘In the Eye of the COVID 19 Storm ‘, where he examined the global economic implications of Covid-19 , and how countries, including Singapore, have acted thus far.
I believe that this webinar will be useful for us to understand the economic implications of Covid-19 and how it will impact Singapore now and the near future.
As such, here are seven key takeaways from the webinar, ‘In the Eye of the COVID 19 Storm’!
Jamus Lim CV
Before we begin, I would like to highlight some of his qualifications and experience.
- Postdoc Political Economics, Harvard University
- PhD International Economics and MA Politics, University of California, Santa Cruz
- MSc Economics, London School of Economics
- BBus (Hons) Economics (major) and Computing (minor), University of Southern Queensland
Also, before he became an associate professor, he had a career as the lead economist with the Abu Dhabi Investment Authority — where he oversaw economic inputs underlying tactical and strategic asset allocation for the sovereign fund’s multi-hundred-billion dollar portfolio.
He was also a senior economist with the World Bank , where he led a number of research initiatives on long-term economic forecasts.
Thus, it’s this combination of qualifications and practical experience which shows that he knows what he’s talking about. Now on to the good stuff.
To provide context, Jamus started off by explaining why the Covid-19 pandemic is a crisis. He talked about how countries around the world are experiencing Covid-19 very differently, with some countries suffering more than others.PHOTO: ESSEC Business School
Based on the epidemiological curves, you can see that the cases and death tolls vary greatly.
He then attributed these changes to when the disease first entered their country, the country’s size and other factors.
But more importantly, he highlighted that this variation in experiences is due to policy responses.
1. Covid-19 represents a concurrent demand and supply shock
An important thing to take note of is that the Covid-19 crisis combines aspects of demand shocks and supply shocks.
A demand shock is defined as a sudden change in consumers’ ability and willingness to purchase goods and services at given prices. Demand shock stems from lower incomes and lower consumer confidence.
A supply shock is defined as anything that negatively affects an economy’s capacity to produce goods and services.
Supply shock stems from the weakened labour market (retrenchments/no-pay leave), reduced capital (low takeups due to heightened uncertainty) and drops in productivity (disrupted supply chains).
Singapore has been affected by demand shock due to the Covid-19 crisis. This has resulted in a loss of income for many Singaporeans , which may lead to belt-tightening and fewer purchases.
In addition, people might avoid going out to support F&B and retail businesses in fear of the virus.
Singapore has also been affected by a supply shock as the Circuit Breaker measures prevented workers from sectors like the hotels and tourism from going to their jobs until recently.
2. Policymakers will have to manage the tradeoff between virus containment and the economy
In a bid to contain Covid-19, policymakers around the world have implemented lockdowns, while Singapore has implemented the Circuit Breaker measures.
Inherently, there is a corresponding economic cost of taking up a more aggressive public health policy.PHOTO: ESSEC Business School
If you take a look at the above chart, you will see that the aggressive containment policies have a deep economic cost in terms of GDP loss.
To mitigate the economic consequences of aggressive public health policy, the Singapore Government has rolled out a large fiscal expenditure package.
It has passed four separate budgets (Unity, Solidarity Resilience and Fortitude) in the form of cash payouts, wage credits, job support and the SG United Traineeships programme to encourage the hiring of fresh graduates.
This is complemented by indirect fiscal support like tax rebates for businesses, fee freezes and a $20 billion loan capital provisioned for viable companies.
In total, the stimulus amounts to $93 billion or about 19 per cent of Singapore’s GDP that the Government is spending on its Covid-19 response.
This is quite a sizeable amount of stimulus, with $52 billion coming from past reserves.
3. Possible Covid-19 recovery outcomes
Jamus then went on to present his opinion about the possible recovery paths for economies and talked about the most likely outcome.PHOTO: ESSEC Business School
He highlighted that the key risk when forecasting Covid-19 consequences is that people tend to be overly optimistic at the start and overly pessimistic after.
However, in general, pandemics tend to tail off towards the end.
Many economists have come up with possible scenarios of how these recoveries might play out.
The general consensus between economists is that economic recoveries will fall somewhere in between a U-Shaped recovery and an L-Shaped recovery.PHOTO: ESSEC Business SchoolPHOTO: ESSEC Business School
The U-shaped recovery is where an economy suffers from a shock but recovers very gradually to pre-Covid-19 levels. As for the more pessimistic L-shaped recovery, an economy will not revert back to the pre-Covid-19 baseline.
The general consensus between economists is that most economies’ recovery will fall somewhere in between.
Some economies might recover to the pre-Covid-19 levels, but take a while to get there, while some may never return to pre-Covid-19 levels.
4. GDP worldwide will be hit hard in the short term and foreseeable future
Jamus then brought up the Purchasing Manager Index (PMI) , an economic indicator derived from monthly surveys of private sector companies around the world.
He added that it was a great forward-looking indicator of economic activity as it measures the business sector’s outlook on the future.PHOTO: ESSEC Business School
A PMI value above 50 indicates growth from the previous month, while a PMI reading below 50 indicates a contraction, and a value of 50 indicates no change.
Unfortunately, for economies around the world, there is significant pessimism about the economy in the foreseeable future.
In addition, the IMF has forecasted that the Covid-19 crisis will hit economies harder than the Global Financial Crisis of 2009.
As mentioned earlier, Singapore’s economy also shrunk by 41.2 per cent in Q2 2020 on a seasonally-adjusted annualised quarter on quarter basis.
5. Inflation will likely be contained
There is some good news – economists expect inflation to be contained.PHOTO: ESSEC Business School
The current concurrent impact on supply and demand from Covid-19 implies that inflation will be kept in check.
6. Global trends of deglobalisation and inequality to be accelerated as a result of Covid-19
However, Jamus thinks that the deglobalisation trend is well underway and has been accelerated by Covid-19.
Countries are becoming more closed off and less open to trade while travel between countries has almost ground to a halt because of Covid-19.
This is also evidenced by the trade war between the US and China and the exit of India from regional trade agreements.
In addition, Jamus thinks that Covid-19 might cause inequality patterns to worsen.
For example, the Work From Home (WFH) measures has generally hit the lower-skilled workers harder.
Unlike the higher-skilled workers who can continue working from home, the lower-skilled workers in the service sector, for instance, might lose their jobs or take no pay leave as the companies they work for might not be deemed essential.
7. Singapore will struggle with the effects of Covid-19 for the foreseeable future
In the webinar, Jamus also predicted that Singapore will experience a recession.
He cited that most observers of Covid-19 predict that life will only go back to normal after a Covid-19 vaccine is found or effective treatments are developed. This could be a year away or longer.
Elements of social distancing and WFH measures will likely be the new normal for the foreseeable future.
But, to expect Singapore’s economy to rebound quickly to pre-Covid-19 levels is very optimistic.
Even if Singapore reopens its economy, it will still struggle if other countries remained locked down.
This is because Singapore’s economy is very open, it has a small domestic economy and is reliant on trade.
But on balance, Singapore has an advantage as it does not have to resort to going to credit markets to borrow due to its substantial reserves.
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This article was first published in Seedly.