ANNUAL REPORT 2002 / 2003

Economic Developments and Monetary Policy

The Global Economy: Still Waiting for Recovery

The world economy has in recent years suffered a series of shocks. The collapse of Enron and WorldCom amid accounting scandals last year severely dented investor confidence – corporate credit spreads shot up and equity markets around the world tumbled. Consequently, households’ net worth declined and spending eased.

Meanwhile, the uncertain outlook and low utilisation rates led companies to put off hiring and other expansion plans. Unemployment rose. In early 2003, consumer and business sentiment deteriorated further as oil prices shot up and geopolitical tensions escalated. The US economy continued to grow at a sub-par pace of just under 2.0% in the first quarter, while growth stalled in Japan and Euroland.

Monetary and fiscal policies have been kept very accommodative, particularly in the US, to counter the soft demand conditions. This has helped to shore up consumer spending, an important pillar of the US economy. However, the relatively firm household spending in the US, coupled with rising fiscal deficits, has led to a sharp deterioration in the current account deficit. Partly reflecting these concerns, the US Dollar has corrected significantly against the major currencies in the first half of this year. A softer US Dollar is expected to put downward pressure on interest rates elsewhere.

While the Japanese economy remains mired in significant structural difficulties, which has rendered monetary easing less effective, there is considerably more scope for Europe to do so. Indeed, the European Central Bank has cut interest rates by a further 50 basis points in early June to 2.0%, which would help to shore up growth in Europe and ease the upward pressure on the Euro.

In Asia, as economies grappled with the sluggish global conditions, another blow came from the outbreak of SARS. The extreme “fear” factor associated with SARS has led to a sharp curtailment of activities in the travel, tourism, hotel and food & beverage sectors. The impact of this demand shock is likely to be felt most severely in the second quarter, particularly in Hong Kong, Singapore, Taiwan and parts of China. Though life is returning to normal in most of the affected areas, suggesting a rebound in third quarter growth from the second, concerns remain of a second wave of infections as winter approaches.

On the whole, while significant risks remain, the world economy is expected to do somewhat better in the second half of 2003, on account of an anticipated pickup in the US. Companies are now leaner, following sharp cuts in capital investment and employment since 2001. Inventories are low. Corporate credit spreads have improved substantially since late last year. Oil prices have eased and stockmarkets have rebounded. A gentle upturn in the US economy in the second half of this year will pave the way for somewhat more favourable global economic conditions in 2004



The Global Economy: Still Waiting for Recovery International Financial Markets: Uncertainty Takes its Toll The Singapore Economy: Roller Coaster Ride
Neutral Monetary Policy Stance in 2002 Increasing the Transparency of Monetary Policy Framework In-depth Economic Research and Analysis

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