"Observations on Current Economic Developments" - Fireside Chat Remarks by Mr Edward S Robinson, Deputy Managing Director (Economic Policy) & Chief Economist, Monetary Authority of Singapore, at the Nomura ASEAN Conference on 4 March 2021
1. In my remarks, I will reflect on the economic impact of COVID-19 and policy responses; next, survey the current state of play, and conclude with key aspects of the ongoing policy agenda.
This Time was Different
2 This time, it was different. Specific causes may have been dominant in typical business cycle recessions of the past. But in 2020, several factors combined to unleash a series of complex, dynamic forces on the global economy.
3 First, the pandemic invoked a simultaneous supply and demand shock.
- On the supply side, public health containment measures disrupted production, and households were compelled to cut back on labour supply.
- On the demand side, the desire to invest fell globally, while households especially in AEs have been saving much of their income.
- COVID-19 revealed that macroeconomic dynamics can shift rapidly.
Stock, J.H. (2021), “The Rate Debate”, Foreign Affairs, March/April. The US unemployment rate, for example, rose 10.4% points in April 2020 and fell 4.6% points over the next three months. Prior to this, the largest monthly increase was 1% point in 1953.
4 Second, COVID-19 triggered bouts of financial stresses.
- In March 2020, money market funds faced large redemptions as a result of risk aversion and the accompanying flight to safety. The abrupt shift in liquidity preference led to disruptions in bank funding costs and even in the US Treasury Bills market.
- As the pandemic developed, the sharp retraction in revenues and cash flows surfaced financial vulnerabilities among segments of overleveraged households and businesses.
5 Third, the rapid spread of the virus caused a temporary constriction in global economic linkages. It did seem for a while, especially at the Q2 trough last year, that “globalisation” was being rolled back and nation states would be on their own.
- As Jeffrey Sachs observed, “a most global phenomenon – a pandemic disease – was suddenly provoking the most localised of responses: quarantines, lockdowns of neighbourhoods, and the closure of borders…”
Sachs, J. (2020), The Ages of Globalisation: Geography, Technology, and Institutions, Columbia University Press.
6 Against the substantial combined weight of these adverse shocks, the sequence and composition of policy responses had to be carefully configured to the complex nature of the crisis. The policy response was not about immediately generating public sector spending and multiplying it through the income stream. Instead, it was about plugging gaps and filling up cracks in the system. Thus, governments quickly acted to unclog essential supply chains, including securing alternative import sources. Across countries, we saw a symmetry of policy responses comprising liquidity and credit measures. In other economies, wage credits and targeted cash transfers reinforced existing safety nets and preserved jobs.
7 As COVID-19 evolved, three policy-relevant aspects of the crisis emerged that I think are worth highlighting: the availability of macroeconomic policy buffers, the importance of open trade links and the risk of hysteresis.
8 First, the ability to take forceful fiscal and monetary policy actions in the crisis without compromising on stability, is conditional on gains made from pursuing sound economic policies in the preceding years. In fiscal policy, this depends on having past reserves to tap on, or a good sovereign credit standing that provides flexibility in financing. Deep domestic capital markets – which allow governments to readily fund additional expenditures in local currency – are also an important factor for flexible fiscal response. At the same time, conventional monetary policy action is constrained to the available space above the effective lower bound of interest rates.
9 Second, maintaining open trade links during crisis times is crucial. Indeed, beyond the initial disruption, trade turned out to be among the lesser casualties of COVID-19, ensuring that diverse sources of supply could be tapped on. In Asia, electronics exports have been resilient, underpinning firm manufacturing production across crucial regional supply chains. Thus, the gains from trade are also to be had in the short-term as they attenuate the effects of domestic shocks.
10 Third, there is a real risk of hysteresis. COVID-19 highlights the consequences of an impairment to human and physical capital arising from the sharp downturn. Displaced workers, for example, could face difficulties in finding stable employment in growth areas, especially given the ongoing shifts in the demand for skills. In some EMEs, the closure of schools coupled with inadequate access to computers and internet connectivity at home, if prolonged, could significantly set back the educational attainment of an entire cohort. Additionally, if investment in the digital IT infrastructure falters for longer, we will not be able to reap the full benefits of this new emerging General-Purpose Technology. Public investment in capabilities should be an important part of the government’s fiscal response.
State of Play
11 Let me now make a few remarks about economic prospects. Even as expectations are gradually being shaped by a more definitive prospect of an end to the virus-related disruption, the risk of virus mutation still implies that the outlook is very uncertain.
12 The central “virus” scenario among macroeconomic forecasters appears to incorporate a diminished impact of COVID-19 disruptions to economic activities. Even if the downside risk materialises and herd immunity in the major economies is delayed to end-2021, it is expected that an important proportion of activity would still be able to continue to recover, as businesses and households adjust around the pandemic restrictions. In other words, this year will likely see the coexistence of economic activity with the restrictions necessary for the latter phase of COVID-19.
13 There are also some signs of a weakening nexus between the course of the virus and some subset of economic activity. We have been trying to follow this time-varying relationship using high-frequency data. Two aspects are relevant
- For each level of stringency of social distance measures, mobility appears to be higher in the more recent period compared to April 2020.
- The positive relationship between mobility and industrial production seems to have weakened over time. More precisely, we calculate that despite the large and growing variance of COVID-19 health-related outcomes, the dispersion in economic activity has come down.
- These relationships could well shift again.
14 At the same time, there is greater clarity on the pass-through of policy stimulus as a powerful tailwind to private sector activity. Government measures undertaken to address the impact of the pandemic total some US$14tn on a global basis, according to IMF estimates.
15 For now, consensus has coalesced around a firmer global GDP growth pick-up in H2 2021 to 6.4%, from 4.3% in H1.
- Beyond the initial Q3 rebound last year, economic performances have already started to diverge somewhat.
- For 2021, the IMF projects global growth of 5.5%, comprising 4.3% growth in the AEs and 6.3% among the EMEs. Within the latter, growth in EM Asia outperforms at 8.3%
IMF (2021), World Economic Outlook Update, January..
- The differing growth projections have much to do with vaccine deliveries, as well as the varying degrees of macroeconomic support.
16 But the recovery is not locked in. I would emphasise that the virus retains a formidable presence in the tails of the distribution of possible GDP outcomes for 2021. Various parameters relevant to the pandemic can shift in an adverse way – the deployment rate of vaccines and their efficacy over time being the most crucial. We therefore cannot let our guard down, and it will most certainly be some time before COVID-19 ceases to be a factor in business and household decisions.
17 On the upside, a firmer upturn than is built in the baseline could come about if vaccination rates pick-up in the next few months, such that for example, the inoculation targets are reached by the summer in the US, coronavirus mutations are contained and fiscal policy imparts a stronger impulse to private spending. This outturn itself may not be entirely benign, and several commentators have warned about inflation risks. It seems likely that headline inflation will step up in the near-term because of base effects including from global oil prices, but an acceleration of cost and price pressures would probably require a faster-than-expected return of the labour market to full employment. Notwithstanding, we do need to anticipate that after an extended period of low interest rates and quiescent inflation, the adjustments in global financial conditions to stronger growth prospects may not be entirely frictionless.
18 For Singapore, I would reaffirm the broad assessment in the October 2020 Macroeconomic Review. In 2020, GDP was subjected to large gyrations – it fell to about 14% below Q4 2019 levels by Q2, before rebounding strongly in Q3. At end 2020, the economy had recouped about 80% of the output loss but remained 2% below its pre-pandemic level. We had pointed to a gradual, uneven, and protracted recovery path. Certainly, the Q4 2020 slowing and projected Q1 soft patch should be seen in this light. From the middle of this year, we could see a firmer upturn, led by manufacturing and exportable services, even as some of the more severely affected sectors slowly regain their footing. The gradual pick-up in the worst-hit sectors, which include construction, and consumer-facing and travel-related services, will be an important step in the economy’s full recovery since these areas now account for most of the remaining output shortfall.
19 It is also important that we see further improvements in the labour market, alongside the upturn in resident labour force participation rates. Some sectoral unevenness in employment growth could persist this year though, and overall wage growth is expected to remain subdued. Similar considerations on inflation as those mentioned earlier, would likely be relevant for Singapore. We do expect some step-up into Q2, reflecting in part base effects, but there is some uncertainty over the subsequent strength in underlying price pressures.
20 The macro-economic policy setting in Singapore has been expansionary, with a strong contribution from fiscal policy.
21 While the estimated impulse of Budget 2021 itself shows an appropriate moderation of 2020’s significant stimulus, this year’s overall cyclically-adjusted fiscal stance will materially support the level of activity in the economy. There are important continuing fiscal stimulus effects from last year’s measures that will combine with those of the current year’s Budget. Budget 2021 was also notable in its tilt, from last year, towards a focus on securing the Singapore economy’s potential growth prospects.
22 Turning to monetary policy, MAS’ intent was to execute the shift to an accommodative stance in a smooth and orderly manner in 2020. During the uncertain and volatile period early in the crisis in Q1 2020, the S$NEER (Singapore dollar nominal effective exchange rate) eased within the unchanged policy band, as the MAS statement (of 5 Feb 2020) acknowledged weakening economic prospects at that time. Market expectations appeared to have been similarly aligned, facilitating the appropriate adjustment of the trade-weighted currency within the band. In this way, the flexibility accorded by the framework had provided the means for the exchange rate to immediately adjust following the outbreak of COVID-19.
23 As the exchange rate settled towards its weaker short-run equilibrium path, MAS eased the monetary policy stance at end-March 2020 by shifting the policy band to that lower level, congruent with the downward revisions to the inflation and output forecasts. MAS also flattened the slope of the policy band. Our assessment in October last year was that it would be appropriate to maintain stability along the 0% p.a. appreciation path for some time, as core inflation was expected to stay low. Having anchored the exchange rate onto its appropriate level in March, the October decision was effectively a signal of stability for the key relative price variable. Our next policy review is as scheduled in mid-April when we will review the usual range of relevant factors pertinent to the prospects for inflation and output.
24 Even as we keep a close vigilance over the next few quarters, we must increasingly give due attention to structural issues. This is especially so as most medium-term projections suggest that global output will be below the pre-crisis trend for some time.
25 I would emphasise a trio of significant tasks in the reform agenda that require discretionary anticipation and planning:
- Upgrading the human capital of the workforce;
- Embracing digital solutions as the new pervasive capital input in production;
- Recognising natural capital in production & shifting to a more nature-friendly growth path.
26 These involve highly complex transitions, which require building up the combination of expertise, infrastructure and networks of mutually dependent businesses that help foster efficiency and innovation in a dynamic, flourishing economy. In partnership with business, labour and educational institutions, the government has ensured broad access to high-quality, relevant education and skills training. Thus, as we capitalise on the overlap and consistency of many aspects of the structural reform agenda with short-term support policies during the COVID-19 period, a dedicated longer-term, inclusive, pro-growth agenda would take increasing importance – an imperative that was given renewed prominence in this year’s Budget.
27 I leave you with these observations. Thank you.