Asian Development Bank, 31 Mar 2009
Singapore
Moving closely in line with the global business cycle, growth decelerated during 2008 on a year-on-year basis and contracted in the fourth quarter. The economy is forecast to shrink this year, before bouncing back next year. A significant fiscal stimulus package will help cushion the severity of the recession, although in the highly open economy much of the stimulus will leak abroad. Cushioning externally induced macroeconomic volatility is a particularly difficult challenge in a city-state.
Economic performance
The global downturn hit this exceptionally open economy with full force during 2008. GDP growth was just 1.1%, far short of the 5-year average of 7.3% in 2003–2007 and the slowest since 2001, when GDP contracted during the global information technology slump. Reflecting the high correlation between the global business cycle and Singapore’s economic performance, GDP growth slowed from 6.7% in the first quarter, year on year, until the economy contracted by 4.2% in the fourth (Figure 3.29.1). On a quarter-on-quarter basis, output declined from the second to fourth quarters of 2008.
The net export slump caused by the global slowdown acted as a serious drag on GDP growth, which was driven entirely by domestic demand. In particular, construction investment in the public sector played a key role in boosting domestic demand.
The impact of the global downturn was most evident in international trade, which fell by 11.6% in nominal terms (5.6% in volume terms) in the fourth quarter. Given Singapore’s role as a trade hub that supports trade-related services from transportation to trade finance, the slowdown
of trade had ramifications far beyond the export-oriented manufacturing sector. This helps explain why Singapore has been among the hardest hit economies. Another factor that has magnified the impact of the global slump is the economy’s shift into higher value-added industries, such as biomedical manufacturing. The upgrading helps diversify the industrial
base, but also increases dependence on demand from those industrial countries at the center of the global crisis. Total exports fell by 13.9% in the fourth quarter (Figure 3.29.2), although growth in the first 3 quarters, buoyed by high oil prices that raised prices of petroleum exports, allowed for growth of about 13% for the whole year.
Non-oil domestic exports fell by 19.6% in the fourth quarter, and by 1.9% for the year. External demand weakened in 2008 relative to 2007 for integrated circuits, consumer electronics, telecommunications equipment, and personal computers, as well as for pharmaceuticals, petrochemicals, and primary chemicals. Demand for non-oil exports weakened most notably from the United States (US) and Europe. Petroleum exports fell late in the year but rose for the full year by more than 50%. In volume terms, oil exports expanded by 15.5%.
In the context of domestic demand, robust investment more than offset faltering consumption. Private consumption growth slowed to 2.4% in 2008, less than half the rate of 2007 (Figure 3.29.3). Consumption contracted in the fourth quarter. Deteriorating labor market conditions
have led to concerns over job security and an erosion of consumer confidence. Further denting consumer confidence has been the year-long rout of the stock market.
Higher government consumption bolstered overall consumption growth to 3.6%. Both private and public investment grew at a healthy pace—14% and 13%, respectively. However, private investment contracted by 13% in the fourth quarter as business confidence plummeted in reaction to the fast-deteriorating global outlook. The growth in investment was largely driven by an upturn in construction, which overshadowed generally feeble equipment investment.
From the output perspective, business services, construction, and financial services were the biggest contributors to GDP growth in 2008 (Figure 3.29.4). Construction roared ahead by 20%, while business services and financial services expanded by 7.4% and 5.5%. For the year as a whole, all sectors except manufacturing made positive contributions to GDP growth. However, the financial services industry contracted by 8.1% in the fourth quarter, due to the global financial crisis and the economic slowdown. Trading activities fell substantially in foreign exchange, stock brokerage, and fund management. The fourth quarter also witnessed the contraction of wholesale and retail trade as well as transport and storage, largely as a result of declining world trade volumes.
Manufacturing suffered the biggest contraction, for both the fourth quarter (down 10.7%) and the entire year (down 4.1%). The manufacturing slump was driven by weakening global demand, and was most evident in the electronics and biomedical industries.
Inflation surged to 6.5% in 2008, from 2.1% in the previous year and 1.1% on average in 2003–2007. The surge was sparked by higher global oil and food prices during the first 3 quarters, and inflation eased by late 2008.
Of greater concern was the deterioration of the labor market in line with the worsening economic outlook. Employment rose by about 27,000 in the fourth quarter, less than half the 56,000 growth in the third, and although for the whole year employment increased by a healthy 227,000, most of the gain came in the first half. The number of layoffs, which climbed to 13,400 in 2008 from 7,700 in 2007, also rose sharply in the final quarter.
In the external accounts, lower surpluses were recorded in both goods and services trade. The current account remained in substantial surplus, equivalent to 14.8% of GDP. Gross international reserves rose to $174.2 billion
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