Singapore's GDP Growth Weakened Sharply
In view of the weak external environment, the Singapore economy registered growth of 1.1% in 2008, a significant fall from the 7.8% recorded the year before (Chart 1). While the latter half of 2008 marked the tipping point, when economic activity fell off most sharply, the underlying growth momentum had already begun to moderate in the earlier part of the year.
Despite posting double-digit sequential expansion in Q1 2008, mainly due to an upswing in biomedical production, growth rates across many key sectors had slowed or even turned negative. For the rest of the year, the domestic economy was buffeted by a succession of adverse shocks, including a downswing in the volatile biomedical industry in Q2, financial turbulence arising from the global crisis, and a collapse in trade as the fallout from the financial crisis spread to the real economy worldwide.
In Q4 2008 and Q1 2009, economic activity in Singapore experienced a steeper-than-expected decline amid deterioration in the trade-related industries, such as manufacturing, transport and wholesale trade. The pullback in G3 demand had hit production networks around Asia which, in turn, caused intra-regional trade to collapse. This weighed on Singapore's GDP, which declined by 10.1% year-on-year in Q1 2009, after falling by 4.2% in Q4 2008.
Taking into account the synchronised nature of the global downturn and the adverse contagion from the impaired global financial system, it is not surprising that, in Q1 2009, the Singapore economy recorded its deepest output decline in a downturn. Unlike past recessions where some industries bore the brunt of the contraction while others remained pillars of support, the current decline has been broad-based across the manufacturing and services sectors. The severity of the impact on Singapore stems from its strong external orientation. The share of external demand in total demand has increased markedly over the last decade, reaching 76% in 2008 and causing the economy to be more vulnerable to global headwinds.
In more recent months, concerted fiscal and other stimulus measures introduced by governments across the world have borne fruit, as the rates of contraction in domestic and external indicators have eased. However, with the global economy and financial system remaining fragile, the sustainability of any incipient rebound is uncertain. Moreover, any intensification in the severity of the Influenza A(H1N1) or new shocks to the global financial system would further set back the recovery.
In tandem with the slowing economy, price pressures have eased. After averaging 6.5% in 2008, inflation fell to 2.1% in Q1 2009 and turned slightly negative in April and May (Chart 2). CPI inflation in Singapore has been on a downward trend since Q2 2008 due initially to the dissipation of the impact of the GST hike and, subsequently, to the collapse in global oil prices. Other drivers of inflation last year, such as escalating global food prices and elevated domestic business costs, have also moderated. More recently, administrative measures from the Resilience Package, as part of the Singapore Budget, have contributed to the fall in headline inflation rates.
Inflation may remain slightly negative for the rest of the year, partly due to the high base. Globally, imported price pressures from oil and food - the key sources of domestic inflation in 2008 - should ease sharply this year. On the domestic front, the prices of some retail goods and the costs of accommodation will continue to decline in the coming months. Consumers are also likely to benefit from cost savings passed on by businesses, as wages and rentals moderate further.