An uncertain and protracted recovery

The road ahead looks rocky for the Singapore economy despite a fourth round of government support measures

On 26 May, the government announced the Fortitude Package, the fourth set of stimulus measures to buffer the impact of the Covid-19 pandemic, and to provide continued relief for businesses and Singaporeans during the phased lifting of the circuit breaker measures after 1 June. This supplementary budget will cost about S$33bn, which brings the total fiscal response to the pandemic to S$92.9bn, approximately 19.3% of nominal GDP. This also entails an additional drawdown of the past reserves by S$31bn, bringing the total drawdown on reserves to S$52bn. With this latest drawdown, Singapore’s overall fiscal deficit is now expected to increase to S$74.3bn, or about 15.4% of GDP.

Yet, the uncertainties on the health front continues to exacerbate the risks on the economy, globally and within Singapore. Even with the gradual opening up of Singapore’s economy, the recovery ahead is expected to be arduous, as global economic activities are far from returning to normalcy. Before an effective vaccine is developed and made available to countries around the world, the risk of a second wave of infection remains a clear and present danger as countries, including Singapore, attempt to navigate an uncertain recovery path ahead.

Despite the better-than-expected economic showing in the first quarter, with GDP expanding 0.7 per cent year-on-year (YoY), the full impact of the pandemic will be felt only in the second quarter. Significantly weaker global demand, a labour shortage in the construction sector, supply chain disruptions and restrictive measures imposed during the circuit breaker will inflict a severe blow to the economy.

We expect the headline growth figure to sink to a contraction of about 8 per cent YoY in the second quarter, before modest and gradual improvement takes hold in the subsequent quarters. While quarter-on-quarter growth could bounce back to positive as early as 3Q20 following an expected deep contraction in the second quarter, the headline YoY growth figure is likely to remain stuck in the negative territory for five consecutive quarters before turning positive in 2Q21. Yet, this comes largely on the back of an exceptionally low base this year.

Indeed, to view the recovery merely in YoY growth terms could be misleading, considering the low base effect. Our assessment is that not only will the current recession be deeper than the past ones, the duration of the current cycle will also be more protracted. That is, it will take a much longer time for the economy to recover to pre-COVID levels given the current economic climate and prospects ahead. Factoring in an expansion of 3.5 per cent for 2021 based on our forecast, overall real GDP will only revert to pre-COVID levels by the end of 2021. This will be a 24-months cycle compared to about 18 months for the Asian Financial Crisis in 1998/99 and the Global Financial Crisis in 2008/09.

The Fortitude Package

The Fortitude Package is forward-looking in nature. Beyond helping companies cope with immediate concerns, there are measures to help companies cope with the new normal after the pandemic via the digitalisation of processes. This will enable companies to capitalise on new opportunities when recovery sets in. Policy focus has also shifted beyond saving jobs to creating new opportunities for workers who are displaced, and for the present cohort of fresh graduates.

Specifically, some of the measures include the extension of the Job Support Scheme by one month to cover August’s wages; an extension of Foreign Worker Levy waiver and rebate for up to two months for the construction, marine and offshore, and process sectors; the introduction of the Digital Resilience Bonus to help businesses digitalise; and the launch of the SGUnited Jobs and Skills Package worth S$2bn to create jobs, traineeships positions and training support for up to 100,000 workers.

Like many parts of the world, Singapore is heading into extreme economic conditions amid the impact of the COVID-19 pandemic. The current recession will be the deepest and most protracted since Independence. However, beyond coping with the immediate economic pain, it is also important for policies to focus on the recovery, particularly when this will likely be a long haul. Appropriate policy intervention will enable enterprises to strengthen their capabilities and allow workers to reskill and upskill. Efforts in this direction will ensure that the economy will emerge stronger after the crisis.

The author is Irvin Seah, Senior Economist at DBS Group Research. Irvin is also the Chairman of the SBF SMEC Research Sub-Committee.