Rebound in Singapore's economy likely to take longer than previous recessions: MAS

How long will it take for Singapore’s economy to reach pre-Covid levels?

Singapore’s economy is still reeling from the blow of the Covid-19 pandemic and the resultant restrictions imposed to curb the spread of infections.

While the economy posed a 7% contraction in flash estimates for 3Q2020 – a significant improvement from the 13.2% plunge seen in 2Q2020 – this is still some 7% below the 0.8% growth registered pre-Covid in 4Q2019 ended December 2019.

See: Persistent uncertainty dials back expectations of strong 3Q rebound

The improved numbers in 3Q2020 was the result of the resumption of most business activities from June 19, when Phase 2 of Singapore’s re-opening kicked off.

With most activities having resumed, the pace of recovery going forward is expected to moderate in the subsequent quarters.

This follows the income losses faced by firms and households as well as the overhang from an uncertain global economy, the Monetary Authority of Singapore (MAS) noted in its half-yearly Macroeconomic Review on Oct 28.

“Some pockets of the economy, particularly the travel-related and some contact-intensive domestic services, are not expected to recover to pre-pandemic levels even by the end of next year,” it explains.

These developments will result in reconfigurations in consumption patterns and the nature of some jobs, and thereby weigh on the labour market.

“The nature of the Covid-19 shock has rendered this crisis to be deeper and likely more prolonged than past recessions,” adds the central bank.

It notes that in previous recessions, Singapore’s economy took about four quarters to fall from peak to through. By contrast, the trough that occurred in 2Q2020 was far deeper than in past downturns.

Similarly, the recovery in past recessions was symmetrical to the decline, with the economy taking three quarters to move from its trough to its performance prior to the crisis.

This time however, the MAS reckons that 3Q2020’s rebound is unlikely to be sustained.

Furthermore, the lack of wide-scale vaccination in Singapore and abroad raises “threat[s] of repeated outbreaks that will continue to generate economic uncertainty, hampering a more decisive recovery,” it explains.

To this end, MAS expects Singapore’s growth momentum to slow in 4Q2020 ending in December while full-year contraction falls within its official forecast range of 5 to 7%. It is looking at a modest 2021 with above-trend growth due in part to this year’s low base.

Meanwhile, it expects Singapore’s resident unemployment rate to stay elevated in 2021, while wage growth remains low.

Drawing reference to the resident unemployment levels during the 2008/2008 Global Financial Crisis, MAS notes that the numbers took six quarters to return to pre-crisis levels. This time, it cautions that there will be a more gradual decline.

Latest estimates from the Ministry of Manpower (MOM) shows that the resident unemployment rate edged up 0.4 percentage points to 4.5% in August – slightly higher than the 0.3 point increase in July when Singapore’s resident unemployment rate was 4.1%.

See: Singapore's jobless rate edges up further in August

Against this backdrop, the MAS has maintained its forecast ranges of -0.5 to 0% for headline and core inflation in 2020. For next year, it is looking at the numbers edging up to -0.5 and 0.5% for headline inflation and 0 to 1% for core inflation as more domestic activities resume.

With this, the disinflationary effects of government subsidies as well as the drag from lower oil prices seen this year will fade, the MAS explains.

With this in mind, the central bank has maintained the 0% slope in its Singapore Dollar Nominated Effective Exchange Rate (S$NEER) policy band and has signaled that an “accommodative monetary policy stance would be appropriate for some time”.

“This would support the Singapore economy through the fragile recovery and ensure medium-term price stability,” it stresses.

See: MAS maintains Singdollar policy stance in Oct, citing a rebound in Singapore's economy in 2021

The struggles of the Covid-19 pandemic is not confined to Singapore, notes the MAS. It is looking at global GDP contacting by 3.9% in 2020 – below the levels expected pre-Covid - before expanding by 6.2% in 2021.

“The pandemic and the resulting recession is the deepest since the Second World War,” it observes.

“The near-term rebound is expected to fade to a partial and protracted recovery, as activity will likely be hampered by recurrent localised outbreaks of the virus and the imposition of associated movement restrictions.”

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