What happens if we go into a recession
The signs are there
1. [The inverted yield curve which is a leading indicator of recessions]
2. [Singapore’s non-oil domestic exports falling by 14.6% in Q2 2019]
3. [Government’s downgrade of GDP forecast for 2019 to 0 - 1%]
More importantly, we know the causes and these are causes unlikely to be resolved / go away in the short term.
The 3 key causes triggering a global economic downturn would be
1. The US-China Trade War
2. General political instability leading to a pessimistic economic climate
3. We are nearing the end of a 10-year economic cycle (at least for the U.S.)
What’s different between this upcoming recession and the Global Financial Crisis of 2008?
1. While United States was the trigger for the Global Financial Crisis in 2008, China provided an ‘alternate’ engine of growth, something like a back-up engine providing some respite.
2. During the Global Financial Crisis, there was more room for maneuver when it comes to monetary policy. Prior to the Global Financial Crisis. [The Fed Fund rate was at around 5.25% in June 2007. Today, it stands at 2.4%. ]The Federal Reserve cuts interest rates as a policy tool to stimulate consumption & investment in the economy. With a present lower interest rate, there is less room for cutting rates - [which means monetary policy is less effective compared to before].
What would the Singapore government’s response be?
What a counter-cyclical monetary policy would look like
In ‘peace-time’, Singapore maintains a ‘modest and gradual appreciation stance’ for the SGD. The primary objective of such a stance is to address inflation and ensure price stability.
A progressively stronger SGD helps to fend off inflation by
1. Making imported goods cheaper
2. Reducing cost of production as imported inputs become cheaper
3. Reduce demand pull inflation by moderating a strong export-led growth (if any) through making our exports more expensive
In a global economic down-turn, where demand for our exports are hurt, and inflation is either low / non-existent - there is no reason to continue a modest and gradual appreciation of the SGD as this now has the negative impact of reducing our export competitiveness in a time where demand for exports are already poor.
In previous period of poor economic growth / recession - the MAS switched to a neutral monetary policy stance, also known as the “0% appreciation stance”.
We typically do not practise a ‘depreciation’ stance because it makes imported goods more expensive thus any gains from an increase in export competitiveness would likely be offset from an increase in cost of production.
I would go ahead and say that while a ‘depreciation’ stance is unlikely, it is a possible stance that can be adopted this time round.
Why?
President Trump’s administration has shown inclinations towards a direct intervention of the USD, signalling a possible devaluation of the USD. This can trigger a competitive devaluation by Central Banks. In the presence of devaluation of major world currencies, the SGD will appreciate against them. This will then dampen our export competitiveness. In other words, remaining at ‘doing nothing’ is not actually ‘status quo’ - the SGD will effectively be appreciating against other currencies.
To ensure that there is ‘0%’ appreciation, the MAS will actually have to intervene to depreciate our currency to maintain a ‘0%’ appreciation.
What a counter-cyclical fiscal policy would look like?
1. Transfer Payments to both firms & households
For firms, the goal will be for the government to help maintain employment levels. There will likely be transfer payments similar to what was offered in the Jobs Credit Scheme introduced in 2009’s Resilience Package. The Jobs Credit Scheme provided employers with a cash grant to cover 12% of the wages paid out, subject to a $2500 cap on wages.
Effectively, such a policy acts as a subsidy for firms and helps firms to keep their wage bill low and potentially reduces or perhaps even eliminate the need to carry out retrenchment in this case.
For individuals, a 1-time special GST cash-voucher could potentially be given, with varied amounts given depending on income levels. Workfare Income Supplement Payouts could also be increased for a year.
2. Tax-relief
There will likely be a one year or two year rebate on both corporate income taxes and personal income taxes.
3. Spending more on infrastructure
Unannounced infrastructure projects could be announced ahead of time while infrastructure projects due to start later could be brought forward. This will provide a boost to the construction sector.
4. Increased recruitment in the public sector
There could be increased hiring in sectors whereby it makes sense to do so given the synergies in policy-making. For example, I would expect there to be increased general hiring for
- Childcare, Pre-school & early childhood education
- Healthcare
There could be plans to provide a ‘scholarship’ for mid-career changes for those who lost their jobs or are ‘structurally’ unemployed to undergo training and actually get paid during the training, so that they can now be re-employed in these various sectors of the economy that will see future growth.
Will we survive?
This upcoming recession? Definitely. [In 2009, Singapore’s GDP growth was a negative 1.3%], we rebounded strongly with a 14.7% GDP growth in the year 2010. This was in part because of the Resilience Package of 2009, but also due to the boost in tourism and also hiring from the opening of the two integrated resorts in 2010
Our prudent fiscal policy in usual years, mean that we are armed with reserves allowing for a resolute response in ‘special extenuating circumstances’ like the Global Financial Crisis in 2008.
The question is if we will be able to withstand a prolonged fragmented trading environment
While we can survive this one - the concerns are not about this coming recession but if we are going to face more issues given the increasing fragmented trading environment now giving that there is increasing protectionism instead of co-operation (other than the obvious US-China trade war, look at what is going on between South Korea & Japan), the anti-globalisation movement (what will really happen with Brexit? And what happens after?). How about political stability that is becoming increasingly - unstable?
Can we withstand multiple hits to our economy over a prolonged period given our trade reliance?
It is difficult to constantly use fiscal stimulus to prop up the economy as that will have an impact on our budget position given the already rising government expenditures in recent years.
That’s not forgetting that over time, we have other issues to content with like the budget strain from an ageing population, increasing structural unemployment due to automation & structural changes in the economy.