Living with SARS The Economic Consequences on Singapore

Living with SARS: The Economic Consequences on Singapore Edward Robinson Economic Policy Department Monetary Authority of Singapore 2 August 2003

Outline of Presentation • • • Business Cycles in Singapore The Economy Pre-SARS Diagnosis: The Q 2 Impact from SARS Post SARS: The Initial Upturn Support Provided by Macroeconomic Policy

Business Cycles in Singapore

GDP Growth from 1980 Singapore’s Real GDP (LHS) Composite Foreign GDP (LHS) Global Chip Sales (RHS) 2003 Q 2 (est. )

World Demand-Domestic Supply Curve DS 1 Price Level (Domestic currency) WD 1 WD 2 Q 1 Real GDP

Fall in External Demand Drop in Exports Businesses' Profit Margins Squeezed Dynamics of a Downturn Cutback in Investment Spending Cutback in Labor Costs: Wage Cuts, Shorter Work Weeks, Retrenching Workers Private Disposable Income Falls Consumer Sentiments Down Drop in Consumer Spending Decline in GDP

A Different Kind of Shock SARS: A Medical Emergency Direct Impact on Consumer Behaviour Globalisation People Shun Crowded Places Negative Impact on Commerce Sector GDP Growth Exposure to Foreign Risks

The Economy Pre-SARS

Recovery derailed by uncertainties… 1998 Asia Financial Crisis 1985 Recession Trough = Q 4 85 Trough = Q 3 98 Q 2 2001 Downturn Trough = Q 3 01 quarters

… as manufacturing output levelled off due to geopolitical uncertainties… Q 3 01 Manufacturing Value-added

The Q 2 Impact from SARS… Verily I say unto you; where art thou, my patrons?

Four Stages of an Epidemic Denial Impact/Fear Ø Low public awareness Ø Greater public awareness Ø First fatality reported Ø Fear factor Ø Economic activity disrupted Ø Heightened uncertainties & risk aversion Ø Stepped up measures to prevent the spread of the disease Ø A few months Ø 1 -2 quarters Possible Relapse Acceptance Ø Public accustomed to epidemic Ø Fears dissipated Ø Partial resumption of economic activity Ø Intensive research on cure Ø Up to 4 quarters Recovery Ø Infection rate tapers off Ø Economic activity slowly returns to precrisis levels Ø Underperformance for several years before returning to trend Timeline

The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport

The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport Tier 2: Significantly Affected Restaurants Retail Land Transport

The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport Tier 2: Significantly Affected Restaurants Retail Land Transport Tier 3: Moderately Affected Real Estate Stock broking

The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport Tier 2: Significantly Affected Restaurants Retail Land Transport Tier 3: Moderately Affected Tier 4: Less Affected Real Estate Manufacturing Stock broking Construction Post and Communication Wholesale Sea Transport Services Allied to Transport

Tier 1 Travel Related Segments State in Apr-May: Critical Condition Visitor Arrivals Air Passenger May

Tier 2 Domestic Oriented Segments State in Apr-May: Weak Condition Retail Sales Volume

Tier 3 Asset Markets State in Apr-May: Moderately Affected US (NASDAQ) US (DJIA) Singapore (STI) 2003

Domestic Demand-Supply Curve DS 2 Price Level (Domestic currency) DS 1 DD 2 Q 3 Q 2 Q 1 Real GDP

Deadweight Cost to Society DS 2 Price Level (Domestic currency) DS 1 DD 2 Q 3 Q 2 Q 1 Real GDP

Support Provided by Policy

Fiscal Support Tourism-related Industries $155 m Transport Industries $73. 5 m Courage Fund $14. 8 m Expansionary Fiscal Policy off-budget packages

Monetary Support Flexible Mgt of S$ Low Interest Rates Conducive Monetary Conditions

Support Provided by Policy DS 2 DS 3 DS 1 Price Level (Domestic currency) A B DD 1 DD 2 Q 3 Q 2 Q 4 Q 1 Real GDP

Post-SARS: the Initial Upturn

Travel-related sectors saw a modest turnaround end-Q 2 Hotel Occupancy Rate (RHS) Air Passengers Handled (LHS) Visitor Arrivals (LHS) Jun

Manufacturing sector could see some recovery going forward Index of Industrial Production (LHS) Non-oil Domestic Exports (RHS) Jun Recession Unlikely, Q 3 growth positive, Improvement in Sars hit sectors

Outlook for Growth Easier Monetary Conditions Weak External Demand? Expansionary Fiscal Policy multi plier effec t Support for the economy GDP Forecast Range 0. 5 – 2. 5% 2 nd Wave of Infection?

* Key Points * Singapore hit by increasing frequency of shocks Sars was different in nature • Medical Emergency • Both DD/SS Effects • Sectoral Specific Economic Resilience • Strong Institutions • Decisive Govt Response (Medical+Economic) • Flexibility in Markets • Social Cohesion

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