So what happened prior September to make the economists downgrade their forecast for Singapore’s GDP growth?
‘Singapore’s inflation accelerated to the fastest pace since January as transportation and housing costs increased, maintaining pressure on the central bank to allow the currency to strengthen even as growth falters.’ (Adam et al, 2011)
Due to the sharp increase in housing costs and high COE (Certificate of Entitlement) premiums, the CPI (Consumer Price Index) inflation rate rose to 5.4% in July (Recent Economic Developments in Singapore, 2011). Inflation leads to a rise in the general price level hence money loses its value (Haikal, 2005). Consumers cannot buy as much as they could previously, thus consumer spending will fall, and companies will lower production as demands for goods and services decrease.
In addition, there is growing uncertainties in the global economy, which undesirably affects the GDP growth in Singapore.
With a highly developed and successful free-market economy, Singapore depends heavily on exports, mostly in consumer electronics, IT products, pharmaceuticals and service activities. Our main trading partners are Malaysia, European Union, United States and China (Trading Economics, 2011).
In April to June 2011, due to the exports/imports disruptions from the Japan earthquake in March 2011 and a weaker demand from the advanced economies, Singapore’s economy saw a sequential fall as trade-related activities slackened. The economic growth in Eurozone and US slowed dramatically. Manufacturing activity fell by 23.7% following a 97.2% surge in the preceding quarter. This decline includes both the contractions of electronics and non-electronic products (Trading Economics, 2011).
Singapore’s GDP and Sectoral Growth Rates in 2010
Figure 1.1: (Source: Economic Survey of Singapore, 2011, p.2)
Figure: 1.2: Source: Recent Economic Developments in Singapore, 2011
Why is there a decrease? Let’s talk about the main influences to the sluggish global economic growth - European and the US crisis.
Years of unrestrained spending, strong welfare systems and cheap lending left Greece with a debt of €300 billion (CNN, 2010). Greece struggles to pay its bills, as its low credit rating raises the interest rates on existing debts, thus reflecting badly on the credibility of the euro.
US credit rating was also downgraded early in August due to its nation’s fiscal path and its broken political system. The analysis of US debt to GDP was evaluated as unsustainable. Lawmakers find themselves in a tough position deciding on resolutions, as the politics involved are so caustic (Riley, 2011). This has never happened to the US, hence views of US effectiveness, credibility and stability are greatly affected globally as the communities are in doubt.
The decline of the economy of foreign large countries results in a reduction of imports in Singapore, leading to a lower demand for goods and services, thus reducing production. Companies will have to layoff employees because lesser workers are needed to produce a smaller amount of goods. When the unemployment rate increases, consumer spending will reduce as they lose their income. This in turn leads to lesser demands for consumer goods and import revenue acquired from global shipping trade decreases.
These are some of the factors that contribute to a revised forecast of Singapore GDP growth. With no natural resources, Singapore has little to shelter from the global downturn since we are largely reliant on developed countries for its trade-related activities. The growth outlook remains vulnerable to downside risks of the soft global economic conditions.
“Governments should play active roles in managing the high inflation rate faced by an economy.”...