S’pore Likely To See L-Shape Recovery But A New “K-Shape” Is Emerging
According to the latest data from the Ministry of Trade and Industry, Singapore suffered its deepest economic recession on record in the second quarter (Q2) of 2020.
In the second quarter of 2020, the economy shrank 13.2% year on year (year on year), more than the estimated decline of 12.6% and the worst on record.
MTI expects the economy to contract 5 to 7 percent this year, lowering its previous forecast from a contraction of 4 to 7 percent.
Trade and Industry Minister Chan Chun Sing said, “The forecast for 2020 basically means that the growth generated in the past two to three years will be reversed.”
Five months after the onset of the pandemic-induced economic recession, the shape of the “recovery” is taking shape – and it’s not a pretty picture.
Singapore expected to experience an L-shaped recovery
In a home interview on March 27, Prime Minister Lee Hsien Loong said the economy during Covid-19 would not be a “V-shaped recovery,” in which there is a sharp but brief decline followed by a rapid recovery.
It wouldn’t even be a “U-shaped recovery,” where there is a gradual decline followed by a gradual rise, he added.
Given the difficulties of lifting a lockdown, economists have predicted that an L-shaped recovery is more likely.
An L-shaped recovery is characterized by a slow rate of recovery, with persistent unemployment and stagnant economic growth.
L-shaped recoveries occur following an economic recession characterized by a sharp decline in the economy, but without such a sharp recovery.
In Singapore, preliminary data from the Ministry of Manpower (MOM) on Wednesday, July 29, showed that the overall unemployment rate rose to 2.9 percent from 2.4 percent in the previous quarter, while that total employment (excluding foreign domestic workers) fell further. that four times.
This is the highest unemployment rate in more than a decade, with downsizing doubling.
In August layoffs continued as we saw Singapore Press Holdings and Millennium Hotels and Resorts lay off their employees. The extended employment support program can only delay the inevitable.
With unemployment at its highest in 10 years and continued downsizing, this indicates the likelihood of an L-shaped recovery.
The potential for a K-shaped economic recovery
However, an economist hinted at an interesting concept of a “K-shaped” recovery where some segments of the economy have recovered sharply, while others continue to decline.
According to the Washington Post, a K-shaped recovery will see “those at the top of the pile strengthen their positions while the rest will see their fortunes deteriorate further.”
“It’s a recovery for financial market investors and another recovery for everyone,” said Joe Brusuelas, chief economist at RSM.
Closer to home here in Singapore, an example of this K-shaped economic recovery is where the manufacturing and financial services sectors begin to see an upward recovery, while the services sector is still stuck in the rut.
Industries on an upswing
Earlier this month, on August 19, MOM declared the dormitories of migrant workers to be free from Covid-19.
Once the Covid-19 is cleared, migrant workers will be able to return to work once dormitory operators, employers and workers make the necessary preparations to do so safely.
With this, the construction sector will start contributing to the growth of the economy later this year and further boost the recovery in 2021.
Meanwhile, the financial services sector is said to have grown 5% in the first six months of the year, posting better results compared to the same period last year.
While the Monetary Authority of Singapore (MAS) expects growth in the sector to slow between June and December due to weaker credit demand and lower interest rate margins, it is little likely that the sector will contract.
Besides the construction sector and the financial sector, the manufacturing sector has also been supported by a surge in the production of pharmaceutical ingredients and biologicals.
In fact, it increased 2.5 percent year-over-year in the second quarter, mainly due to a surge in production in the biomedical manufacturing cluster.
Growth was fueled by the production of Covid-19 test kits, which were being mass-produced by local biomedical companies to meet the demand for testing.
Industries that continue to decline
As some industries grow year on year, service sectors such as tourism and hospitality continue to suffer until a vaccine becomes widely available to help remove the brakes on the local economy and businesses. international travel.
Our airline industry is not going to recover anytime soon as international travel has yet to pick up.
In the latest news, our national carrier SIA reported burning half of the S $ 8.8 billion it raised from selling shares in just two months.
The funds were used to repay a bridging loan that was taken out to help the business from March to June, to buy back SIA’s 10-year bonds, to repay notes and repay funds previously drawn on certain lines. credit.
The International Air Transport Association said last month that the airline industry was unlikely to make a full recovery until 2024.
In addition, the events industry is one of the most affected industries, as business meetings, events, concerts, seminars, etc. cannot resume with the limit of five people for social gatherings in place.
As the retail and restaurant industries see more footfall and customers since the breaker was lifted, the fallout from Covid-19 has impacted too many businesses, many of which are unable to sustain and ultimately to close.
In particular, the F&B sector has seen many store closures and the retail sector has seen a series of bankruptcies such as sportswear retailer Sportslink, minimalist lifestyle brand MUJI and retailer of GNC supplements.
Industries experiencing uneven recovery
The tourism and hospitality industry sees the government coming to their aid with a S $ 45 million tourism campaign launched to inspire locals to explore Singapore.
Agencies partner with local communities, such as foodies, photographers, nature groups, and heritage groups, to help locals discover hidden gems.
The hotels have reopened their doors to welcome guests for stays since July. 204 hotels have received authorization to resume their stay activities as of August 17.
As these select hotels reopen for stays, hostels and budget hotels are missing out on the stay boom amid Covid-19.
The hostel operators, which are smaller businesses, cannot afford to sustain the activity until tourism picks up.
On the real estate side, while the private residential market is also expected to recover strongly from the economic downturn, the difficult situation in the commercial real estate market remains an issue.
The private residential real estate market had recovered from the SARS outbreak in 2003 and the H1N1 pandemic in 2009, but neither has experienced a country lockdown or strict security distancing measures.
Home sales rose in July for a third consecutive month. July sales were up 8.2% from June, which was itself an increase from the previous month.
Christine Sun, head of research and advice at OrangeTee & Tie, said market fundamentals such as political stability, security, transparency and ease of doing business, which have attracted foreign investors to the city-state will remain strong. post-pandemic.
On the other hand, many questions about the future of office demand remain.
With remote working popularized by Covid-19, some companies have even allowed their workers to work from home permanently, like Twitter.
As a result, direct investment in commercial real estate fell 29% globally to $ 321 billion in the first six months of 2020 compared to the period a year earlier, according to data from the company. JLL commercial real estate services.
Repercussions of a K-shaped recovery
So it is clear that we may be seeing a K-shaped economic recovery with some sectors continuing to grow while others continue to decline.
In a K-shaped recovery, jobs will fully recover for the highest wages and some segments of the economy will recover as well.
People with low incomes fall deeper into poverty, having lost their jobs or suffered wage cuts. The rest of the economy continues to decline.
This is leading to a widening income gap and an increase in income inequality around the world.
Fallout from Covid-19 could widen the income gap, according to national bank DBS.
Based on anonymized data from 1.2 million accounts, the bank reported that more than 300,000 workers saw their wages cut by more than 10% between March and May.
About half of those affected earned less than US $ 2,190 per month, suggesting that low-income groups are the hardest hit.
Workers aged 35 to 44 were identified as the age group with the most severe deterioration in income.
In addition, in times of economic crisis, many companies chose not to pay the 13th month bonuses and froze pay increases.
With all this, the poor get poorer and the income gap widens.
Additionally, employees have been placed on shorter work weeks and temporary layoff provisions due to reduced business activity and they will likely continue until the safe distancing measures are fully lifted.
In addition, some workers said their employers had told staff that they should “return working hours” when operations resume after the breaker ends.
How can the economy recover
The government can help Singaporeans who work in struggling industries to transition to other industries, by upgrading and learning new skills.
One of the measures Singapore is already implementing is the TechSkills Accelerator (TeSA) program.
We are also seeing SIA cabin crew who were previously deployed as hospital care ambassadors making the permanent switch to healthcare as they find a new calling as patient care agents.
Additionally, the government has been swift in its response to the recession, implementing all four budgets and pumping money into industries struggling to survive.
All of these measures will support the economy until the Covid-19 vaccine is available to lift the brakes on international travel and social distancing measures.
Featured Image Credit: Revenue Hub
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