SINGAPORE: The ongoing economic crisis caused by the COVID-19 pandemic is “deeper and likely to be more protracted” than past recessions, the Monetary Authority of Singapore (MAS) said on Wednesday (Oct 28).
Some parts of the economy, especially those that are travel-related, may not return to pre-pandemic levels by the end of next year as the Singapore economy faces a “gradual but uneven” recovery, the central bank added in its latest half-yearly macroeconomic review.
Improvements in the labour market will likely be “uneven and slow”, with the resident unemployment rate – made up of citizens and permanent residents – likely to stay elevated in 2021, keeping wage growth low, said MAS.
ECONOMY TO SLOW IN Q4
The pandemic and a “circuit breaker” implemented to curb the spread of COVID-19 dragged the Singapore economy into a record slump in the second quarter.
The resumption of business activities following the end of the circuit breaker may have slowed the economic decline in the third quarter, but this effect is not expected to last into the fourth quarter.
“With most industries already reopened, the supply-side impetus to growth will taper off in the quarters ahead,” the central bank said in its report.
“At the same time, the shock will continue to propagate through the demand side of the economy as firms and households continue to be restrained by income loss and increased uncertainty, therefore holding back on investment and discretionary spending.”
MAS expects economic momentum to slow in the final quarter of 2020, reiterating the Ministry of Trade and Industry’s (MTI) earlier projection that the economy will contract between 5 and 7 per cent for the full year.
READ: Singapore's third-quarter GDP shrinks at slower pace of 7% after economy gradually reopens following circuit breaker
Growth will “remain modest” in 2021, with travel-related and some “contact-intensive” domestic services unlikely to recover to pre-COVID-19 levels even by end-2021. Activities in these sectors “could still fall short of pre-pandemic levels until health risks abate”, MAS added.
The travel sector is expected to see prolonged headwinds as borders reopen “very gradually”. MAS said Singapore may “lag the global recovery in air transport given the absence of domestic flights”.
Even though green lanes and travel bubbles are being progressively rolled out, the revival of cross-border travel may be “hesitant” due to recurrent waves of infection and strict travel measures.
Initiatives such as the SingapoRediscovers vouchers could shore up domestic tourism and support some players within the sector, but MAS said that residents’ spending on accommodation and recreation services will not be able to compensate for the loss in tourism spending.
READ: COVID-19: Singapore, Hong Kong reach in-principle agreement to establish bilateral air travel bubble
In the consumer-facing sector, the initial boost - due to the easing of distancing measures in the third quarter - is expected to wane in the final three months of the year, said MAS.
“On the demand side, it remains unclear whether the early rebound in the retail and F&B sectors from pent-up consumer demand can be sustained, as tourist arrivals will stay depressed and heightened economic uncertainty will continue to cap discretionary spending by households,” the central bank said.
Some of the sectors that have held up amid the pandemic could also moderate moving ahead. The pharmaceutical segment, for instance, could see a decline in the level of activity in the coming quarters.
DEEPER AND MORE PROTRACTED CRISIS
The MAS report said the pandemic-induced recession has been unprecedented in its intensity.
During past recessions, the economy took about four quarters to fall from peak to trough but this time, the trough in gross domestic product (GDP) had occurred by the second quarter and “was much deeper” due to the “nature of the COVID-19 shock”.
Singapore saw a cumulative 14 per cent decline in GDP between pre-crisis levels in the fourth quarter of 2019 to the trough in the second quarter, more than double of the average contraction of 6.1 per cent across previous downturns.
The central bank also compared the characteristics of the COVID-19 crisis with past recessions across metrics such as production, expenditure and income.
It found that the COVID-19 shock had a greater impact on domestic-oriented industries whose close linkages to the rest of the economy amplified output losses.
MAS said the recovery profile in past recessions was “fairly symmetrical” to the decline, with the economy taking three quarters to return from the trough to pre-crisis levels.
But in the current cycle, the economy’s rebound in the third quarter after the trough largely reflected the phased reopening after the end of the circuit breaker. This momentum is “unlikely to be sustained in the subsequent quarters”, it noted.
“Without wide-scale implementation of vaccination programmes in Singapore and globally, the threat of repeated outbreaks will continue to generate economic uncertainty, hampering a more decisive recovery,” the central bank’s report said.
“Thus, the recovery will likely be more prolonged than in previous recessions.”
RESIDENT UNEMPLOYMENT TO STAY ELEVATED
In the labour market, the fall in employment observed during the first half of 2020 was more rapid than previous recessions. MAS noted that this reflected the near-cessation of activities in labour intensive sectors when the circuit breaker was in place.
The reopening of the domestic economy in the third quarter should see some underutilised labour capacity being absorbed but beyond the immediate rebound, recovery in the jobs market would be protracted, it said.
“Prolonged weakness in the travel-related sector is expected to spill over to some of the adjacent industries, while the shift in consumption away from labour-intensive services could also keep overall labour demand muted,” said MAS.
An example of the latter would be how the growing prevalence of telecommuting could curb demand for domestic transportation services.
“Substantial uncertainty” in the macroeconomic outlook for 2021 will also mean weaker than expected activity in many sectors, which together with further balance sheet strains, may constrain labour demand.
Even better performing industries could see job growth ease, as firms may have brought forward hiring in the face of temporary incentives from the Government.
“In the absence of a smooth handover from public-supported to private sector-led employment, a strong labour market recovery is not assured at this juncture,” MAS said, adding that overall employment will “only expand modestly” next year.
The central bank also said it expects local employment “to rebound more strongly” than foreign employment, partly due to wage subsidies from the Government.
READ: IN FOCUS: Graduating into a COVID-19 jobs market - short-term challenges and longer-term issues?
But the rebound in resident employment in 2021 may not be strong enough to bring the economy rapidly back to full employment, it added.
Reasons include mismatches in the labour market, with COVID-19 accelerating structural declines in labour demand for low- and mid-skill services jobs due to the availability of new automated processes.
New labour demand could derive mainly from the modern services sector, where jobs may be more intensive in cognitive and information and communications technology skills.
“These emergent skills mismatches between excess labour supply and new labour demand may increase search frictions and impede labour market reallocation,” said the central bank.
Taken together, MAS said the resident unemployment rate “is forecast to only edge down gradually next year”. In turn, it is expected to weigh on wages for the rest of this year and possibly into 2021.