Commentary

Modest recovery likely as S'pore economy emerges from Covid-19 doldrums

GDP expected to grow as business activity resumes, but unemployment may still rise

Singapore's economy is heading out of the Covid-19 doldrums and will continue to reopen and recover, but job losses are likely to persist.

With the fundamental cause of the slump - the curbs imposed to contain the coronavirus - largely removed, economic activity in Singapore is set to improve.

The impact of the crushing blow from the April to May circuit breaker in Singapore and lockdowns elsewhere was laid bare this week, in the advance growth estimates for the second quarter by the Ministry of Trade and Industry (MTI).

The economy shrank by 12.6 per cent year on year in the April to June period, and by a record 41.2 per cent quarter on quarter.

With the resumption of business and mobility - amid relaxation of containment measures on June 1 and a swift move to phase two within 19 days of that date - previously shut ledger books at shops and factories would have started to record transactions that make up a nation's gross domestic product (GDP).

For instance, the June purchasing managers' index reading marked the fifth month of contraction for the overall manufacturing sector.

But it was above the level in April, when the gauge of industrial activity dropped to the lowest level since November 2008, which was during the global financial crisis.

While increasing GDP will result in smaller growth contractions in subsequent quarters, unemployment may still continue to rise as key sectors such as construction and services - especially retail, tourism and travel - will remain lethargic, at best, given that most travel curbs are still in place.

The construction sector shrank by 54.7 per cent year on year, a significant deterioration from the 1.1 per cent decline in the first quarter.

The subdued domestic sectors will limit the extent of the rebound in private consumption, while lingering supply chain disruptions and trade conflicts - such as United States-China tensions - will check significant gains in exports.

The above factors are probably why the MTI has not revised its May forecast of a full-year contraction of 4 per cent to 7 per cent.

Given that business conditions are likely to remain tough, companies may need to cut expenses to ensure their survival in a slow recovery. That means the labour market has yet to see its worst levels.

 

Rising unemployment in an economy that is growing out of a recession is termed a hysteresis event.

This refers to the phenomenon of an economic event or trend persisting even after the factors that led to it have been removed.

Most recessions give way to hysteresis, and that is why the trough of an economic cycle - which marks the beginning of the end of a recession - is considered the trickiest part for policymakers.

DBS Bank estimates resident unemployment rising to 4.2 per cent, which implies that as many as 97,800 residents could be out of a job by the end of the year.

In comparison, there were 72,900 job losses last year.

The burden of employment in Singapore is mainly borne by the service sector, of which retail - for example, malls, shops, restaurants, theme parks and casinos - is a significant component.

The Straits Times understands that integrated resort operator Resorts World Sentosa will be laying off a significant number of staff, owing to the impact on tourism brought about by Covid-19.

The service sector was the first to go under - even before the circuit breaker was imposed - after evidence of tourists infecting locals with Covid-19 provoked travel restrictions.

International travel is, of course, the starting point for tourism receipts and a large chunk of retail sales here.

According to the Singapore Tourism Board, visitor arrivals in the first five months of the year were down 65.7 per cent, with only 900 arrivals in May.

In May alone, retail sales plummeted 52.1 per cent, a record contraction since the data was made public in 1985.

According to Mr Irvin Seah, senior economist at DBS, tourism and aviation could potentially take more than two years to recover to pre-Covid-19 levels in terms of real GDP.

With travel restrictions likely to persist, the construction sector, which is rather over-reliant on foreign manpower, will continue to face labour crunches.

The sector also has to bear the still-prevalent restrictive measures at work sites.

Even manufacturing, which was the only sector that recorded an expansion in the second quarter, is running mainly on a single engine - the biomedical cluster.

Within the cluster, production of pharmaceuticals has expanded for five straight months this year.

There has been increased demand for medical goods that is due to the pandemic as well. This could continue to support growth in Singapore's non-electronic non-oil domestic exports.

However, for most of manufacturing and exports, geopolitical and trade tensions will remain a drag.

Relations between the world's two largest economies - the US and China - continue to deteriorate, with disagreements emerging on everything from the Covid-19 situation to telecommunications, trade and the recent national security law enacted in Hong Kong.

As the Singapore Government has already pumped in $92.9 billion in four stimulus packages, the bar for further fiscal support for jobs and businesses is quite high.

But if retrenchments continue to increase, the Government may have to extend some of the budgetary measures on job security that are set to expire in the coming months. For instance, the Jobs Support Scheme is set to expire in October.

The labour market typically lags behind GDP growth by about three to six months, as companies try to hold on to their workers for as long as possible, and are wary of hiring in a new growth cycle.

Given that business conditions are likely to remain tough, companies may need to cut expenses to ensure their survival in a slow recovery. That means the labour market has yet to see its worst levels.

Job losses, pay cuts and a slowdown in hiring may transpire more strongly later this year.

The threat of a subsequent wave of Covid-19 infections is, of course, a persistent risk in the absence of a vaccine.

The World Health Organisation recently warned that the disease is unlikely to disappear in the coming months, and that it is unrealistic to expect a perfect vaccine any time soon.

Still, governments across the world have shown hesitance to reimpose strict and large-scale lockdowns, since they now understand the economic cost of doing so, especially in terms of livelihoods.

With Covid-19 infections crossing the 13 million mark, smaller and more targeted measures are more likely - a response that will keep the global economy and Singapore chugging on their way to recovery, albeit at a modest pace.

A version of this article appeared in the print edition of The Straits Times on July 16, 2020, with the headline 'Modest recovery likely as S'pore economy emerges from Covid-19 doldrums'. Print Edition | Subscribe