Singapore will enter into a recession this year because of the blow from the COVID-19 pandemic, resulting in job losses and lower wages, with “significant uncertainty” over how long and intense the downturn will be, the central bank warned on Tuesday.
Depending on how the pandemic evolves and the efficacy of policy responses around the world, Singapore’s economic growth could even dip below the forecast range of -4 to -1 per cent to record its worst-ever contraction, said the Monetary Authority of Singapore (MAS) in its latest half-yearly macroeconomic review. As a comparison, Singapore’s worst recession thus far was during the Asian financial crisis in 1998, when the economy contracted 2.2 per cent. Full-year economic growth came in at 0.1 per cent during the global financial crisis in 2009 and shrank 1.1 per cent during the dotcom bust in 2001.
“The Singapore economy will enter into a recession this year,” said MAS in a 132-page report. “At this juncture there remains significant uncertainty over the severity of the downturn, as well as the eventual recovery. The materialisation of downside risks, that largely depend on the course taken by the pandemic and efficacy of policy responses around the world, could tip the growth outcome in Singapore below the forecast range,” it added.
The grim prognosis comes as Singapore reels from the COVID-19 outbreak. To date, nearly 15,000 people in Singapore have been infected with the disease and fourteen have died. Nearly 85 per cent of its infections are linked to foreign worker dormitories. Singapore is going through a “circuit breaker” period to stem the spread of COVID-19. The period was originally scheduled to end on May 4 but has since been extended until Jun 1. All non-essential workplaces have been closed and residents told not to leave their homes except to buy food and groceries or to exercise alone in the neighbourhood. These measures have taken its toll on the economy, which contracted 2.2 per cent year-on-year in the first three months, marking its first negative quarter since the global financial crisis in 2009.
MAS said the Singapore economy is likely to “contract more sharply” in the second quarter, given the severity of the outbreak among its major trading partners, as well as the circuit breaker measures that kicked in early this month. Beyond that, the outlook is “fraught with uncertainty”. This is because Singapore’s prospects are hinged on external circumstances, such as the transmission and incidence of the virus, as well as the pace at which other countries recover from their own health and economic challenges, the central bank said.
Yet, there is a “poor understanding” of how the COVID-19 situation could evolve globally, it noted. This implies that the depth and duration of Singapore’s downturn, as well as the strength of an eventual recovery, remain unknown. MAS added that it is unclear if the disease will taper off globally in the second half of 2020 and the risk of subsequent waves of infections remain high until a vaccine is found. “Given the likely protracted nature of this pandemic, containment measures can only be wound down in a gradual manner. In fact, intermittent rounds of re-containment measures may be required, thus hampering a decisive rebound in economic activity,” it said.
Singapore faces “significant” downside risks, namely the possibility of stricter measures to stem the spread of the virus, weak demand from external partners and weak consumer spending.
First, any deployment of stricter containment measures around the world would further constrain economic activities and result in a worse-than-expected growth for the second quarter. Any fallout in the global financial markets could also create “negative feedback loops” with knock-on effects on the economy.
Second, if the pandemic takes longer to be brought under control and the resumption of global economic activity is delayed, persistent softness in the world’s final demand could affect the timing of the recovery.
Third, a complete containment may be harder to achieve given the “more contagious but less detectable nature” of COVID-19, compared to the SARS outbreak in 2003. This persistent uncertainty could cause consumers and firms to delay spending, leading to a “more gradual” and “less decisive” global recovery.
Delving into individual sectors, the MAS said most trade-related activity will see a further slump, weighed down by a decline in external demand and supply chain disruptions. One exception would be industries that manufacture medical products, as the pandemic has boosted demand for ventilators, masks and test kits. The central bank’s report noted that several production lines based in Singapore are involved in such production. Apart from British firm Dyson, which is reportedly making digital motors that will eventually be assembled into its ventilators, other non-medical firms, such as Razer and ST Engineering, are setting up production lines to manufacture masks, it said.
For modern services, growth is expected to moderate as the virus outbreak has diminished prospects in the financial sector, while dampening corporate spending on IT and professional services. Activities in the travel-related and domestic-oriented sectors will remain in the doldrums, according to the central bank, until there are clear signs that the pandemic has been brought under control to allow a gradual lifting of containment measures.