Why Singapore Downgraded GDP Without Recession? Explained!Singapore, a small but wealthy city-state in Southeast Asia, has recently announced a slight cut in its economic outlook for 2023. This came as a surprise to many observers, as Singapore’s economy did not experience a technical recession, which is defined as two consecutive quarters of negative growth. So, what led to this downgrade, and what are the implications for Singapore’s future? In this article, we will explain the reasons behind Singapore’s GDP revision, and the challenges and opportunities that lie ahead. What is GDP and why does it matter?GDP stands for gross domestic product, and it measures the total value of goods and services produced in a country in a given period of time. It is basically an indicator of how well the economy is doing. If GDP is growing, it means the economy is expanding and creating more wealth and jobs. If GDP is shrinking, it means the economy is contracting and losing income and employment. GDP is calculated using one of three methods: the expenditure approach, the income approach, or the production approach. The expenditure approach adds up the total spending on final goods and services by consumers, businesses, government, and foreigners. The income approach adds up the total income earned by factors of production, such as labor, capital, land, and entrepreneurship. The production approach adds up the total value added by each sector of the economy, such as agriculture, industry, and services. GDP is usually reported in two ways: nominal GDP and real GDP. Nominal GDP is the value of goods and services at current prices, while real GDP is the value of goods and services at constant prices. Real GDP is adjusted for inflation, which is the general increase in prices over time. Real GDP is more useful for comparing economic performance across time periods or countries, as it eliminates the effect of price changes. GDP is also reported in two terms: annual and quarterly. Annual GDP is the sum of GDP in four quarters of a year, while quarterly GDP is the GDP in one quarter of a year. Quarterly GDP is useful for tracking short-term fluctuations in economic activity, while annual GDP is useful for measuring long-term trends in economic growth. What happened to Singapore’s GDP in Q2 2023?According to the Ministry of Trade and Industry (MTI), Singapore’s GDP grew by 0.1% quarter-on-quarter in Q2 2023, which means it barely increased compared to the previous quarter. This was lower than the initial estimate of 0.3% growth. On a year-on-year basis, Singapore’s GDP expanded by 0.5%, which was also lower than the advance estimate of 0.7%. This means that Singapore’s economy grew at a slower pace than expected in Q2 2023. But wait a minute, you might say. Isn’t that still positive growth? How can that be considered a downgrade? Well, that’s because the MTI also revised its GDP growth forecast for the whole year of 2023. It now expects the economy to grow by 0.5% to 1.5%, down from the previous range of 0.5% to 2.5%. This means that the MTI expects the economy to grow at a slower rate than previously projected for the rest of 2023. Why did Singapore downgrade its GDP forecast?So, why did this happen? What caused Singapore’s economy to lose steam in Q2 2023? And what are the implications for the future? Let’s dive deeper into these questions and find out. Manufacturing and construction were the main culprits behind Singapore’s weak GDP performance in Q2 2023. Manufacturing output and exports have fallen for nine consecutive months, mainly due to weak global demand for electronics and semiconductors, which are key products for Singapore’s export-oriented economy. Construction activity also declined sharply, as public sector projects were delayed and private sector projects faced labor shortages and supply chain disruptions due to the COVID-19 pandemic. On the other hand, services was the only sector that posted positive growth in both year-on-year and quarter-on-quarter terms in Q2 2023. This was mainly driven by consumer-facing and tourism-related sectors, such as retail trade, accommodation, food and beverage services, and recreation and entertainment services. These sectors benefited from the gradual easing of COVID-19 restrictions and the reopening of borders for vaccinated travelers under travel bubble arrangements with selected countries. However, not all services sectors performed well in Q2 2023. Some sectors, such as finance and insurance, business services, information and communications, and transport and storage, saw slower or negative growth due to subdued global economic conditions and increased uncertainty. What are the prospects for Singapore’s economy in H2 2023?So, what does this mean for Singapore’s economic outlook for the rest of 2023? Well, according to the MTI, Singapore expects a modest recovery in H2 2023, supported by inbound tourism and resilience in consumer-facing sectors. However, there are also significant downside risks that could derail this recovery. One of these risks is inflation. Inflation is the general increase in prices of goods and services over time. It erodes the purchasing power of money and reduces the real value of income and savings. Inflation can be caused by various factors, such as rising demand for goods and services, rising costs of production or imports, or expansionary monetary or fiscal policies. Inflation has been rising globally due to several factors related to the COVID-19 pandemic. These include surging energy prices due to supply constraints and geopolitical tensions; frayed supply chains due to lockdowns, border closures, labor shortages, and transportation bottlenecks; pent-up demand due to stimulus measures and savings accumulation; and base effects due to low inflation levels in 2022. Singapore is not immune to these inflationary pressures. In fact, Singapore’s headline inflation rate, which measures the change in prices of a basket of goods and services consumed by the average household, rose to 2.4% year-on-year in June 2023, the highest level since March 2022. The core inflation rate, which excludes the more volatile components of food and energy, also increased to 1.1% year-on-year in June 2023, the highest level since February 2022. The main drivers of inflation in Singapore are food and transport prices. Food prices have risen due to higher costs of imported food items, such as meat, seafood, vegetables, and fruits, as well as higher costs of dining out. Transport prices have increased due to higher costs of petrol, car ownership, and public transport fares. Inflation is expected to remain elevated in H2 2023, but moderate in the longer term. The MTI expects headline inflation to average between 1% and 2% for the whole year of 2023, while core inflation is expected to average between 0.5% and 1.5%. The MTI also expects inflation to ease in 2024, as some of the temporary factors that pushed up prices in 2023 fade away. Another risk that could affect Singapore’s economic recovery is the monetary policy stance of the US Federal Reserve (Fed). The Fed is the central bank of the United States, and it has a dual mandate of maintaining price stability and maximizing employment. The Fed uses various tools to influence the money supply and interest rates in the US economy, which in turn affect the exchange rates and capital flows of other countries. One of these tools is the federal funds rate, which is the interest rate that banks charge each other for overnight loans. The Fed sets a target range for this rate, and adjusts it according to the economic conditions and outlook. A higher federal funds rate means tighter monetary policy, which means less money supply and higher borrowing costs. A lower federal funds rate means looser monetary policy, which means more money supply and lower borrowing costs. The Fed has been keeping the federal funds rate near zero since March 2020, as part of its emergency response to the COVID-19 pandemic. This has helped to stimulate the US economy by lowering the cost of credit and encouraging spending and investment. However, this has also contributed to rising inflationary pressures in the US economy, as well as asset price bubbles in some markets. As a result, the Fed has recently signaled that it will start to taper its bond-buying program, which is another tool that injects money into the economy by purchasing government bonds and mortgage-backed securities. The Fed has also indicated that it will raise the federal funds rate sooner than previously expected, possibly as early as 2024. This means that the Fed is shifting from an ultra-accommodative monetary policy stance to a more hawkish one, in order to prevent inflation from getting out of control and undermining its credibility. This also means that the US dollar will likely appreciate against other currencies, as higher interest rates make it more attractive for investors to hold US dollar assets. How does this affect Singapore?Well, Singapore’s monetary policy is based on managing the exchange rate of the Singapore dollar against a basket of currencies of its major trading partners. The Monetary Authority of Singapore (MAS), which is Singapore’s central bank and financial regulator, sets a policy band for the exchange rate, and intervenes in the foreign exchange market to keep it within this band. The MAS adjusts the slope, width, and center of this band according toits assessment of inflation and growth prospects. A steeper slope means a stronger appreciation of the Singapore dollar over time, while a flatter slope means a weaker appreciation or even depreciation. A wider band means more flexibility for the exchange rate to fluctuate within a larger range, while a narrower band means more stability for the exchange rate within a smaller range. The MAS uses this exchange rate policy to achieve price stability as its primary objective. A stronger Singapore dollar helps to lower imported inflation by making foreign goods and services cheaper in local currency terms. A weaker Singapore dollar helps to boost export competitiveness by making local goods and services cheaper in foreign currency terms. The MAS reviews its exchange rate policy twice a year, in April and October. In its latest review in April 2023, the MAS maintained its policy stance of a zero percent appreciation path for the policy band. This means that it kept the slope flat at zero percent, implying no change in the level of the exchange rate over time. It also kept the width and center of the band unchanged. The MAS said that this policy stance was appropriate given the subdued inflation outlook and modest growth prospects for Singapore’s economy. It also said that it would continue to monitor economic developments closely and adjust its policy as needed. Differing views by other analystsHowever, some analysts expect that the MAS will have to change its policy stance soon, in response to the Fed’s tightening moves. They argue that if the MAS does not follow suit by allowing some appreciation of the Singapore dollar, it will face pressure from capital outflows and currency depreciation. This could lead to higher imported inflation and lower export competitiveness for Singapore’s economy. Therefore, they expect that the MAS will have to increase the slope of the policy band in the next review in October 2023, or even before that, to signal a more hawkish stance and align with the Fed’s actions. However, other analysts disagree with this view. They contend that the MAS has enough room to maintain its current policy stance, or even ease it further, without risking a currency crisis. They point out that Singapore has a strong external position, with a large current account surplus, ample foreign exchange reserves, and a credible exchange rate regime. They also note that Singapore has a flexible and diversified economy, with a high degree of openness and competitiveness. They argue that these factors will help to cushion the impact of the Fed’s tightening moves on Singapore’s economy and currency. Moreover, they suggest that the MAS has other considerations besides inflation and growth when setting its exchange rate policy. One of these considerations is the impact of the exchange rate on income distribution and social welfare. A stronger Singapore dollar may help to lower inflation, but it may also hurt the purchasing power and living standards of lower-income households, who spend a larger share of their income on imported goods and services. A weaker Singapore dollar may help to boost export competitiveness, but it may also increase the cost of foreign debt and investment for businesses and households. Another consideration is the impact of the exchange rate on financial stability and systemic risk. A stronger Singapore dollar may help to reduce external vulnerabilities, but it may also encourage excessive borrowing and leverage in domestic and foreign currency markets. A weaker Singapore dollar may help to stimulate domestic demand, but it may also trigger capital flight and currency speculation. Therefore, they believe that the MAS will adopt a balanced and prudent approach in managing its exchange rate policy, taking into account not only inflation and growth, but also income distribution, social welfare, financial stability, and systemic risk. What does this mean for you as an investor or a saver? So, what does this mean for you as an investor or a saver? Well, it depends on your risk appetite, time horizon, and portfolio allocation. If you are bullish on Singapore’s economy and currency, you may want to invest in Singapore dollar-denominated assets, such as stocks, bonds, or real estate. If you are bearish on Singapore’s economy and currency, you may want to diversify your portfolio into other currencies or assets, such as US dollars, euros, gold, or cryptocurrencies. However, before you make any investment decision, you should always do your own research and analysis. You should also consult a professional financial advisor if you need guidance or advice. Remember that investing involves risks and uncertainties, and past performance is not indicative of future results. ConclusionIn conclusion, Singapore has downgraded its GDP forecast for 2023 without going into a recession. This was due to weak global demand affecting its trade-reliant economy, especially in manufacturing and construction sectors. However, services sectors showed some resilience due to consumer spending and tourism recovery.
Singapore expects a modest recovery in H2 2023, but faces significant downside risks from inflation and US monetary policy tightening. The MAS will likely maintain its current exchange rate policy stance until October 2023, unless there are major changes in economic conditions or outlook. As an investor or a saver, you should be aware of these factors affecting Singapore’s economy and currency, and adjust your portfolio accordingly. You should also seek professional advice if needed. We hope you found this article informative and helpful. If you did, please share it with your friends and family. And don’t forget to check out our YouTube channel, The Investing Iguana, for more videos on personal finance, investing, and retirement planning. Also, let us know in the comments below what you think about Singapore’s economic outlook and exchange rate policy. Do you agree or disagree with the MTI or the analysts? What are your expectations for the next MAS review? We’d love to hear your thoughts and opinions. Thank you so much for reading this article. We’re The Investing Iguana, signing off. See you next time! |
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