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In a recent article by Channel News Asia dated 13 July 2012, it was reported that Singapore's GDP contracted by 1.1% on a Quarter-on-Quarter seasonally-adjusted annualized basis, compared to the 9.4% expansion in the preceding quarter.

The weakened growth momentum in Q2 was mainly due to a sequential contraction in the manufacturing sector. The sector declined by 6.0% reversing the 20.9% expansion in the preceding quarter. Annex A

Singapore is an open economy with high trade to GDP ratio of 2.3 times (GDP 2011 was $326B, whereas total trade value in 2009 was $747.15B) and is exposed to many external factors, especially economic development in a main export market. Our main trading partners are: Malaysia China Euro zone 11.9% 10.4% 11.1%

USA Indonesia

6.5% 9.4%

These 5 regions accounted for 50% of Singapores total trade, of which the US, Euro zone and China contributed 28%. Any negative economic news in these 3 regions will have sizable impact on our economic development.

The US economy grew at a lower 1.5% in Q2 compared with 1.9% in Q1, which establishes the fact that the US economy is growing at an anaemic rate. In addition Singapores second largest trade partner the 27-nation European Union (EU) is currently in recession and does not have the ability to purchase the same amount of Singapores goods and services as they did before (demand declines).

From the article, it can be inferred that demand for our exports has decreased.

The cause can be attributed primarily to 2 main reasons;

1) 2)

The weakening of the economies of our trade partners The strengthening of the SGD

The strength of the SGD has also contributed to Singapores declining exports. In this aspect it is making export prices uncompetitive. (For the same $ spent, fewer goods could be purchased)

Conversely a strong currency allows for higher purchasing power which would lead to an increase in imports. Exports to the EU totalled SGD$48.1 billion last year, while imports from the EU reached SGD$57.9 billion, official data showed.

Singapores Economy has been resilient amid the global economic slowdown by diversifying across a range of sectors including oil and gas, pharmaceuticals and electronic.

More importantly, Singapores long term objective of going into high value-added industries such as medical, biotechnology, geno-technology and nano-technology has also supported the resilience in our economy.

In the past 10 years, ASEAN has developed to become a significant and sizeable trading zone within itself besides, NAFTA and Euro zone. It provides countries like Singapore and Hongkong the opportunity to lead the ASEAN effort as the more successful Asian economies.

Although from the article it can be seen that the simultaneous surges in the electronics and pharmaceutical production that increased GDP growth in Q1 are not sustainable amid global demand weakness. (Manufacturing sector declined by 6 %) Which brings to mind 2 questions when aggregate demand falls what is the possible effects on our economy and how will that affect us? And what is the relationship between aggregate demand and GDP? I shall demonstrate the r/s using graphs

Aggregate Demand Decrease Supply Supply

GDP Price Deflator

GDP Price Deflator

110 100

110

D1

Demand 100 Real GDP

Billions $

D2 90 1 00 Real GDP

Billions $

At the current price level of 110, producers are willing and able to sell $100 billion worth of Product.

Given, the current situation with our trading partners, our trading partners do not have the ability to purchase $100 billion worth of products; however, they may still be able to purchase a small amount at a lower price of $90 billion. When this happens the demand curve shifts leftwards as there is a fall in demand, because of this the Price level also falls to meet at the new market equilibrium (Real GDP 90, Price Level 100)

What does this mean domestically in Singapore?

When demand declines while production output remains unchanged an economy-wide market surplus is created. Faced with a build up of inventories, producers either lower production output or induce sales by lowering the market price. When producers lower their prices they earn less revenue, to offset this lost of income producers would have to lower their cost of production by lowering their overhead costs like labour. This could lead to unemployment in the economy.

Recognizing the extenuating factors, The Monetary Authority of Singapore (MAS) has lowered GDP growth forecast for Singapore and increase inflation for the rest of the year. A slower economic growth does not normally lead to higher inflation. The converse is normally true. Slowing down of demand tend to lead to lower demand for raw materials and thus a fall in material prices. Then why is our inflation level so high? Annex B

MTI released our June CPI, which is inflation The number was 5.3%, compared with 5% in May and 5.4% in April. Singapore (MAS) manages its currency against a trade-weighted basket of currencies of Singapores major trading partners and competitors. When inflation is high, the SGD is allowed to strengthen. As can be seen from the data, inflation remains stubbornly high due to high Housing and Transportation costs. This is caused by high COE prices due to a systematic reduction in number of COEs. And high property prices and housing costs due mainly to low interest rates (too much liquidity in the system), the fact that Singapore is economically stable and is considered a safe haven to live. This caused an

increase in demand for Singapores private properties. Compounding this effect is the fact that there is a signification influx of immigrants to Singapore and large capital inflows finding a new home.

To counter pressures, the MAS have allowed the SGD to slowly appreciate against other major currencies to dampen the impact of imported inflation. The strengthening SGD causes our exports to be uncompetitive, leading to a decline in demand. How could Singapore respond to the slowing economy?

In times of slow economic growth the Singapore government can step in and use fiscal and monetary policies to effect changes in the economy to cushion the negative impact of slowing growth. As discussed earlier the SGD is strong due to an influx of capital from investments therefore there are two ways the government can use monetary policy to weaken the SGD (which will increase our exports and lower the strength of our SGD) 1) Capital adequacy ratio

Increase capital reserve ratio on banks which will tighten liquidity and limit the amount of money that can be lent and the amount of money in circulation.

2)

Selling Government Bonds, again this will sweep up the excess liquidity in the system. If the government issues bonds, it will take up liquidity from the market

The government could initiate more public projects, thereby, creating economic activity domestically to gap the lower GDP growth numbers.

Government spending An example of this was the 2009 Resilience package in response to the slowing economy due to the financial crisis in the US.
1)

Jobs for Singaporeans Government hiring (18,000 public sector jobs) Subsidies for training

Income supplements for low income workers. Stimulating bank lending Special risk sharing initiative to ensure viable companies have access to credit to sustain their operations and keep jobs. Enhancements to existing loan schemes

2)

3) Enhancing business cash-flow and competitiveness

Property tax rebate for industrial and commercial properties Tax exemption on remittance of foreign sourced income Transport rebates and concessions

4) Supporting families Direct assistance to households by giving GST credits

Income, rental and property tax rebates

5) Building a home for the future Annex C Expanding and accelerating public sector infrastructure spending Sustainable development Increased spending on education and healthcare

Annual GDP at Current Market Prices Year 2008 2009 2010 2011 S$ million 268,772.4 270,012.7 310,036.8 326,832.4 US$ million 189,972.0 185,639.5 227,383.1 259,823.8

As you can see GDP increased from S$270b to S$310b, effectively the fiscal policies brought Singapore out of the technical recession in 2009. The economy improves due to effectiveness of fiscal policies as could be seen above. In conclusion the Singapore government can make use of a similar fiscal policy response and the abovementioned monetary policies if and should the economy continues to contract in the next 2 quarters.

-END1357 WORDS

References Article;

Channel News Asia Singapore's Q2 GDP shrinks 1.1% on-quarters By Yvonne Chan/Lynda Hong | Posted: 13 July 2012 0803 hrs http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1213299/1/.html MAS: Fiscal Policy http://www.sgs.gov.sg/macro_overview/macrooverview_fiscal.html

Singapore budget 2009: Resilient package http://www.mof.gov.sg/budget_2009/index.html Singapore taps reserves for S$20.5b economic stimulus plan http://www.channelnewsasia.com/stories/singaporelocalnews/view/404182/1/.html Annex A Ministry of Trade and Industry (MTI); Gross Domestic Product at 2005 Prices

http://www.singstat.gov.sg/news/news/advgdp2q2012.pdf

Annex B Department of Statistics Singapore: Monthly consumer price index http://www.singstat.gov.sg/news/news/cpijun2012.pdf Annex C

Time Series on Annual GDP at Current Market Prices http://www.singstat.gov.sg/stats/themes/economy/hist/gdp2.html