MAS releases latest macroeconomic review for 2020

The Monetary Authority of Singapore (MAS) released its latest macroeconomic review to provide an assessment of Singapore’s economic developments.

Below are the highlights from the April 2020 issue.

Global economic developments

The global economy has suffered a large negative shock. The public health measures taken to combat COVID-19 have inevitably caused severe and widespread disruption to economic activity around the world. The global gross domestic product (GDP) is projected to contract more sharply in 2020 than during the global financial crisis (GFC).

Confronted with the size of the negative shock from the pandemic, governments in many countries have responded innovatively, rapidly and on a large-scale by easing both fiscal and monetary policy. These measures will go some way towards cushioning the impact on households and firms. Economic activity could see some pick up from the third quarter as movement restrictions are gradually eased.

The subsequent recovery, however, will be hesitant and the level of global output is not likely to return to its prior trend in the short term, due to a rise in unemployment, weakened balance sheets and the impairment of the economy’s productive capacity from the loss of human capital. 

Economic developments in Singapore

The Singapore economy is expected to contract markedly this year. The COVID-19 pandemic has dealt a significant blow to the Singapore economy. GDP contracted sharply in the first quarter of 2020, reflecting a combination of travel restrictions, supply-side disruptions and the attendant decline in external and domestic demand. The near-term outlook for the Singapore economy is fraught with uncertainty, and hinges on the evolution of the COVID19 situation globally.

Given the likely protracted nature of this pandemic, containment measures can only be wound down in a gradual manner and intermittent rounds of such measures may be required, thus hampering a decisive rebound in economic activity. The materialisation of downside risks could tip the growth outcome in Singapore below the forecast range of –4% to –1%.  

Labour market slack will increase, alongside a broadening of disinflationary pressures. The abrupt pullback in economic activity due to COVID-19 will weigh heavily on labour demand across broad swathes of the economy. Wages, rather than employment, will bear the brunt of the labour market adjustment in the near term.

Nevertheless, and notwithstanding the large financial buffer provided by the government, retrenchments would still increase and resident unemployment will rise. Other business costs will be subdued amid rising spare capacity in domestic factor markets.

Externally-driven inflation and global oil prices will remain low, notwithstanding some upward pressure on imported food prices due to supply disruptions. Overall, sharply reduced economic activity globally and domestically will exert downward pressure on inflation. Both core and headline inflation measures are expected to turn negative in 2020, the first time since 2002.

Timely and concerted support from monetary, financial, fiscal and regulatory policies should ease the economic cost of the pandemic. A range of financial and macroeconomic policy measures has been introduced to help tide households, vulnerable individuals and businesses over this challenging period and prevent the severe, but ultimately temporary, shock from having a deeper and longer-lasting impact on the economy.

On the monetary policy front, MAS has set the exchange rate at an appropriate level to prevent a broadening of disinflationary pressures. This is further complemented by steps to increase liquidity to the financial system, relax regulatory requirements for banks and collaborate with the financial industry to ease credit conditions for businesses and households.

Fiscal policy will play the primary role in mitigating the impact of the recession. The government delivered three budgets for the fiscal year 2020 (FY2020) within a nine-week period, and the combined fiscal impulse is the most expansionary on record. The measures taken will save jobs, protect livelihoods and help businesses preserve their capacity and capabilities so that the economy can emerge from this severe downturn relatively undamaged. 

Box articles

Does infrastructure development affect the ASEAN-5 countries’ ability to attract foreign direct investment (FDI)? Regional supply chain reconfiguration has recently led to an increasing proportion of FDI being diverted to the ASEAN-5 countries. This box explores whether policy reforms and infrastructure spending (proxied by public sector investment) in the region have aided in attracting FDI. The study finds that increased public investment, better infrastructure quality and economic competitiveness are associated with higher FDI. 

The Jobs Support Scheme (JSS) announced in the FY2020 Budget is in many respects similar to the wage subsidy schemes that the Singapore government rolled out during the SARS episode, and in the aftermath of the global financial crisis.

This box compares two previous wage subsidy schemes: Jobs Credit Scheme (JCS) implemented in the aftermath of the GFC and Central Provident Fund (CPF) contribution cut for employers during the SARS episode. The study finds that the JSS is more sizable, timelier and more targeted than its antecedents. It will provide larger wage subsidies, especially to sectors most impacted by the pandemic, during a period when cash flow constraints for firms are likely to be tightest.

Special features

Asia’s electronics supply chains and global trade corridors. This special feature examines the shifts in patterns of electronics trade in Asia and globally, focusing particularly on the impact of the US-China trade conflict.

Over the past two decades, a China-centric production and trade network has emerged in Asia, but following the onset of US-China tensions in 2018, there has been some diversion of exports away from China towards other Asian countries. There is also tentative evidence of in-sourcing by the US and gains by Mexico in the US market, which suggest that the tariffs have catalysed the growth of the US-Mexico electronics production network.

Nevertheless, Asia’s labour cost advantage is unlikely to be eroded over the short term. As such, both regions will likely continue to remain major producers and consumers of electronic products, even as important shifts in comparative advantage take place within Asia.

Regulation, technology and the banking sector. This special feature argues that the growth of shadow banks—non-depository institutions that fall outside the scope of traditional banking regulation—can be traced to the increased regulatory burden faced by traditional banks, and to the technological changes adopted by shadow banks.

The author, professor Amit Seru, contends that the approach to regulating shadow banks requires an analysis of policies’ impact on both banks and shadow banks. Seru is the Steven and Roberta Denning professor of finance at the Stanford Graduate School of Business. 

Privacy, trust in banks, and use of cash. This special feature is an empirical investigation into two psychological factors that could affect the use of cash—privacy and trust in banks. The study finds that the use of cash to pay for retail purchases increases with concern for privacy, and decreases with confidence in banks.

The findings suggest that government policy to promote electronic payments may have to address fundamental concerns about privacy and confidence in financial institutions. The study was conducted by Ivan Png, distinguished professor in the School of Business and Departments of Economics and Information Systems and Analytics (by courtesy) at the National University of Singapore (NUS), and Charmaine Tan, a post-doctoral fellow at the NUS School of Business.

Re-disseminated by The Asian Banker

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Wealth & Society Conference 2020
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