ANNUAL REPORT 2002 / 2003

Economic Developments and Monetary Policy

The Singapore Economy: Roller Coaster Ride

Singapore saw volatile growth last year. (See Chart 15.) The economy grew by 2.2% in 2002 following a contraction of 2.4% the year before. Growth in the first half surged, led by manufacturing. Both electronics and non-electronics output expanded strongly as the global IT sector rebuilt inventories and the domestic pharmaceutical industry added new capacity. The initial upsurge reflected higher external demand for our exports, with positive spillover effects for our trade-related services industries.

But after the fairly strong rebound in the first half, the pace of the global recovery faltered. Equity markets and business sentiment tumbled around the world, and the domestic economy slowed considerably. Key sectors retracted in the second half, with a sharp decline in the pharmaceutical sector dulling the manufacturing sector’s performance.

The electronics segment also deteriorated as the boost from inventory adjustments moderated and end-demand in the global marketplace remained sluggish. Construction contracted by 10.8% in 2002. Growth in the services sector weakened considerably in the second half, largely on account of the decline in trade-related services. Domestic-oriented and tourism-related services added to the downward drag as rising concerns about the economic recovery and the risk of further terrorist attacks dampened domestic consumer and tourist sentiment.

The outlook for the Singapore economy remains clouded by uncertainties in the external environment. During the first quarter of 2003, the Singapore economy expanded by a modest 1.6% on a year-on-year basis, with growth supported by manufacturing and trade-related services sectors. Nevertheless, going forward, the weak outlook for the global electronics industry could have direct knock-on effects on Singapore’s exports.

The outbreak of SARS, with its dampening effects on domestic consumption and tourist arrivals, will also weigh heavily on Singapore’s performance, particularly in the domestic and tourism-related services industries.

Reflecting these factors, the official Gross Domestic Product (GDP) forecast for 2003 of 2.0% - 5.0% growth has been lowered to 0.5% - 2.5%. Any improvement in Singapore’s economic condition is predicated on the return of global business confidence and spending in the second half of the year.

The weak economy meant sluggish labour demand, with significant job cutbacks in the goods-producing industries. The seasonally adjusted unemployment rate rose to 4.5% in March 2003, from 4.2% in December 2002. Though real wages have moderated, we have yet to see new hirings. Real wage growth declined significantly in the last two years, from 7.5% in 2000, to 1.3% in 2001 and 1.1% in 2002.

Consumer Price Index (CPI) inflation averaged –0.4% for 2002 as a whole, compared to 1.0% in 2001. (See Chart 16.) The fall was largely due to lower prices of oil-related items in the CPI basket. This was despite the two hikes in electricity tariffs and the three increases in petrol pump prices during the year. The National Trade Union Congress (NTUC) FairPrice supermarket chain’s price cuts and the FY2002 Budget package helped to keep a lid on the cost of key consumer items. But the prices of some other consumer items continued to rise, particularly those of services, suggesting some underlying price pressures still remained in the economy.

The sluggish economy in the first half of 2003 implies that labour market conditions are likely to remain soft in the near term. Real wage growth moderated to 1.7% year-on-year in the first quarter of 2003, and is likely to remain subdued, especially in view of the National Wages Council’s recommendations for wage cuts in the SARS-affected sectors and wage freezes in many other businesses. Overall consumer prices rose by 0.7% in the first quarter of 2003, largely reflecting the one-off effects of the oil price shock and hikes in several administrative charges, including the 1.0% increase in the Goods and Services Tax (GST) rate and the upward revision in excise duties on alcoholic drinks and tobacco. Inflationary pressures are expected to remain contained this year, given the continued slack in the economy, including in the labour market. For 2003 as a whole, headline CPI inflation is expected to come in between 0.5% and 1.5%.


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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