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Living with SARS: The Economic Consequences on Singapore Edward Robinson Economic Policy Department Monetary 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: 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 Business Cycles in Singapore

GDP Growth from 1980 Singapore’s Real GDP (LHS) Composite Foreign GDP (LHS) Global Chip 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 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 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 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 The Economy Pre-SARS

Recovery derailed by uncertainties… 1998 Asia Financial Crisis 1985 Recession Trough = Q 4 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 … 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, 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 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 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 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 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 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 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 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 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 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 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 Support Provided by Policy

Fiscal Support Tourism-related Industries $155 m Transport Industries $73. 5 m Courage Fund $14. 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 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) 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 Post-SARS: the Initial Upturn

Travel-related sectors saw a modest turnaround end-Q 2 Hotel Occupancy Rate (RHS) Air Passengers 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 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 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 * 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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