SINGAPORE (May 8): With over 3.5 million cases and at least quarter million deaths globally, Covid-19 is as much as health crisis as it is an economic crisis. Governments worldwide have been forced to implement safe distancing measures and movement control orders to slow the spread of the disease and manage the load on healthcare systems. And these measures have inadvertently impeded operations of key economic activities and caused widespread global economic disruption.
The Asian Development Bank estimates this disruption to climb as high as US$4.1 trillion ($5.8 trillion) in 2020, or almost 5% of the global GDP, depending on the extent of the disease’s spread in the US, Europe and other major economies. However, the Manila-based lender notes that a quicker containment of the virus could halve the economic slowdown to US$2 trillion, or just 2.3% of global growth. Of this, developing Asia, comprising 45 countries including Singapore, China and India, is said to account for approximately 22% to 36% of the total cost of the pandemic.
“No one can say how widely the Covid-19 pandemic may spread, and containment may take longer than currently projected,” said ADB’s chief economist Yasyuki Saswada at a 2020 Outlook briefing on April 3. “The possibility of severe financial turmoil and financial crisis cannot be discounted,” he adds, noting that the employment of some 68 million workers across Asia will be threatened if the pandemic stretches to September. Of this, 98,000 is expected to come from Singapore.
Meanwhile, the International Monetary Fund (IMF) says that the economic downturn is panning out to be the worst global recession since the Great Depression between 1929 and 1939. Economists say the Great Depression had caused GDP to retreat by some 10% while unemployment rates peaked at 25% at its height.
With this in mind, the macroeconomic watchdog has slashed its 2020 global growth forecast to –3%, from its previous prediction of 3.3% announced in January. “This is a crisis like no other, which means there are substantial uncertainties about the impact it will have on people’s lives and livelihood,” said IMF economic chancellor Gita Gopinath at a press conference on April 14. “A lot will depend on the epidemiology of the virus, the effectiveness of containment measures and the development of therapeutics and vaccines — variables which are very hard to predict,” says Gopinath.
The watchdog now estimates the cost of the pandemic to climb as high as US$9 trillion between 2021 and 2021. This is greater than the combined size of the Japanese and German economies.
Economies are already crumbling from the weight of the health crisis. For instance, economic growth in the US is expected to contract 5.9% this year while Europe — where the outbreak is said to be as severe as in China’s Hubei province where the virus strain originated from — is slated to have a 7.5% reduction in output. Developing countries are likely to perform slightly better, the IMF says. As such, the Asean-5, comprising Indonesia, Malaysia, the Philippines, Thailand and Vietnam, is forecast to shrink by 0.6%.
Haircut
However, specifically for Singapore, the likely contraction is not to be underestimated. The country is bracing for a massive slowdown this year, with GDP for the year is predicted to shrink by between 1% and 4% this year. Even so, the Monetary Authority of Singapore (MAS), which released this forecast just last month, is also warning of “significant downside risks to Singapore’s growth outlook”.
But even a contraction of just 4% — while more modest than private-sector economists’ worst fears of a 10% dip — would mark Singapore’s deepest recession since independence. By comparison, the city state’s worst recession thus far was during the 1997 Asian Financial Crisis (AFC) when the economy contracted 2.2%. Meanwhile, during the 2009 Global Financial Crisis (GFC), full-year economic growth came in at 0.1%, while the dotcom bust of 2001 shrank the economy by 1.1%.
Singapore’s de facto central bank observes that, in particular, the drag coming from output for services that are consumed on a recurring or habitual basis will be lost permanently, rather than deferred to after the easing of the “circuit breaker” measures. To explain this, Sumit Agarwal, professor of Finance, Economics and Real Estate at the National University of Singapore (NUS), compares it to demand for haircuts: “If I don’t get a haircut now, that demand is just gone, it’s not that I can go and get that haircut twice in the future. That money is lost forever.”
This large decline in output will see a shuttering of a large number of companies as well as significant job losses and wage declines. “Notwithstanding the government’s support measures, some firms affected by the fallout of Covid-19 may still have to undertake labour cost adjustment measures such as putting workers on shorter work weeks or no-pay leave,” says MAS.
Stepping stone for upturn
The cracks to the Singapore and global economy will not show immediately upon the easing of movement control restrictions. For instance, China, which is one of the first countries to progressively lift its lockdown, has been described as a “90% economy” now by some economists. This is to reflect an approximately 10% drop in its economic activity because consumers either no longer require certain services or do not have disposable income to spend on non-essential goods and services. This in turn affects the recovery of already cash-strapped businesses.
As depressing as this may seem, Dietrich Vollrath, economics professor at the University of Chicago, says that a slow or stagnant economy may actually be the stepping stone to a nation’s eventual economic rebound. As an example, he points to America’s average annual growth rate of 2.3% between 1950 and 2000 against its dip by roughly half between 2000 and 2018. To him, the slowdown symbolised improvements in “human capital” as the workforce became more productive and creative.
Similarly, market watchers believe the crisis will allow the labour market to re-adjust itself towards enhancing productivity and output to bring stronger growth in the future. “The crisis will reveal not just vulnerabilities but opportunities to improve the performance of business,” say Kevin Sneader and Shubham Singhal of Mckinsey & Company. These opportunities come from an accelerated adoption of technology to make work processes more seamless and efficient as well as a “re-imagination” of the company’s target audience and product offerings. Data from a 2018 Oxford Economics-Cisco study further reinforces this, showing that about 26 million higher-paying jobs will be created in Asean-6 nations (Indonesia, the Philippines, Vietnam, Thailand, Malaysia and Singapore) between 2018 and 2028 through technological advancements.
Asean+3 Macroeconomic Research Office’s (AMRO) chief economist Khor Hoe Ee agrees, noting that companies in the Asean+3 region (comprising Asean, Japan, China and Korea), can leverage on technology to grow their manufacturing and export services. “With more companies tapping on technology, they can improve their product offerings. Countries can in turn develop stronger comparative advantages in those products, thereby facilitating opportunities for more unfettered trade in the region,” observes Khor. He believes that this will add to the region’s value proposition of being “Factory Asia” or “Shopper Asia” since it serves as the source of final demand for goods and services.
To explain this, Khor references Thailand’s automotive industry which moved from employing low-cost workers to leveraging on technology to manufacture parts and components. “Thailand has developed much deeper capacity in the automotive ecosystem, so other countries go to it for inputs. So, if other countries in the region can similarly develop their strengths, the currently distorted global supply chains can be revived,” he notes.
For this, Khor stresses that policymakers should broaden and quicken their efforts in developing human capital and facilitating freer cross-border flow of skilled labour and professionals and rules governing trade. His comments are timely, given the need for better integration amongst countries to facilitate a continuous seamless supply of goods and services. Government officials have followed suit, with trade ministers from Singapore, Australia, Canada, New Zealand and South Korea agreeing to expedite customs procedures and clearance of essential items such as food and medical supplies from May 1. Under this agreement, there will also be more seamless movement of people across these countries.
Collectively, these measures point to a need for the global supply chain to remain connected through a rebirth of globalisation. With the recent resurrection of trade tensions following US President Donald Trump’s threats to “punish” China with tariffs for allegedly causing the outbreak of the coronavirus, it seems more urgent for economies to stay connected to fight further disruptions to trade patterns and economic slowdown.
Khor and ADB’s Saswada also believe that a fresh perspective on “social safety net” is needed to recognise the growing importance of the gig economy. The pandemic has seen several employees of ride-hailing operators and food-delivery joints left jobless. This further threatens to widen the gap between the lower- and middle-income populations. As such, economists argue that a differentiated approach can be used to ensure a more even distribution of resources. For instance, the amount of handouts received by citizens can be varied based on their income levels.
The Covid-19 tsunami has upset several industries, which will take time to recover as businesses and countries pick themselves up — first by stemming the spread of the virus and next by looking ahead to reviving the economy. To Khor, it is a reminder “of our collective destiny [by] challenging the region to demonstrate its resilience and commitment to come up with solutions that safeguard and strengthen our long-term interests”.
“The capacity to rise to the challenge is not in doubt, and the will to shape our future together is strong,” he adds.
