Singapore Slump Makes for a Toxic Cocktail

(page 2 of 2)

Private consumption, for example, makes up only about 40% of GDP, so any fiscal stimulus designed to boost domestic demand will only have limited impact on overall GDP.

Reasons to be cheerful

On the other hand, write the economists at HSBC, regional demand should strengthen during the second half of the year, offering relief to exporters; "wholesale demand"—transport and logistics—represented by port activity, has slumped as regional economic activity has declined. In November, the Singapore port recorded its first decline in traffic volume since 2001.

Also, sharp falls in commodity prices should drive down inflation to 2% from a recent high of 7.5% which will pass through to higher real incomes. The Monetary Authority of Singapore (the central bank) has already apparently relegated the inflation threat to the backroom. In October, the MAS, which uses the exchange rate rather than interest rates as its main monetary policy tool, gave up its anti-inflationary strategy of gradually appreciating the Singapore dollar against a basket of currencies. Instead, it shifted to a "zero appreciation" stance, and announced it would maintain the dollar at the low end of a narrow band. Now many economists believe that a downward re-centering of the currency band is likely.

Surprisingly, the labour market was fairly resilient last year, with almost 200,000 jobs created despite the recession, but the downside is that with productivity having fallen, unemployment could rise more quickly. Unemployment could reach 4.5%-5% this year, says Kit. This will have consequences including a rise in credit card delinquencies and falling residential property prices.

Aware of the pending problem and, as always, pragmatic, the government is trying to expand the safety net, for example by providing subsidies for re-training [introduced last November]. This is especially important in the context of a widening income gap. Not only had the income gap widened, but incomes of those in the bottom 20% actually saw their real wages stagnate between 2000 and 2005, with wages only starting to rise in 2006 on the back of the tight labour market, says Kit. "This group will likely be hit harder in the current recession, which suggests the need for the government to provide some form of support, while not undermining the incentive to work."

Anecdotally, Singapore has become an even more comfortable place for expats with money and a job. There are no longer waiting lists for international schools, you can now just walk into smart restaurants without having to book days in advance, and even find a vacant bar stool at Raffles Hotel to enjoy an optimistic Singapore sling. Of course, the famous shopping malls are crowded, but, some observers suspect, people are often just window-shopping, socialising or simply taking advantage of free air-con.

Rupert Walker is a senior reporter.