Global crisis and recession 4 Economic situation and prognosis for Singapore 7



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Global crisis and recession

1.This Budget comes at a time of grave economic crisis. Growth in the global economy as well as in Singapore last year fell well below what was expected. We are now in the midst of a simultaneous recession in all major regions of the world. Prospects for 2009 remain highly uncertain.
2.Economic activity has taken a sharp turn downwards in the last six months in the advanced economies. GDP is estimated to have fallen by about 5% in the US in the fourth quarter of 2008. The Euro area fared as badly, while the contraction in Japan is estimated to have been even larger. Global manufacturing production fell by almost 20% in the same quarter (on an annualised basis), while global trade and cargo volumes have also slumped.
3.Asia has not been decoupled from the decline in the advanced economies. Across the region, industrial production and exports have fallen dramatically in recent months. In China, industrial production towards the end of 2008 is estimated to have been below half the levels seen at the start of the year. Taiwan’s exports contracted by 42% in December and Singapore’s by 21%1. Korea’s latest export data shows a decline of over 30%.
4.The result is that jobs are at risk everywhere. Job losses in the US in Dec 2008 were the worst in 60 years, and unemployment has risen to 7.2%. In the Euro area, it has risen to 7.8% and in Japan to 3.9%, and is expected to rise further. Even in China, despite positive economic growth overall, job losses have risen sharply in the coastal provinces.
5.Governments around the world are taking unprecedented steps to stimulate their economies and re-capitalise their banks. Central banks have cut interest rates aggressively. However, with little room left for interest rates to fall, most governments have turned to expansionary fiscal packages as their main policy response.
6.The new US Administration’s fiscal package is currently expected to be US$825 billion spread over two years, which will increase its government deficit by 2.8% of GDP each year. Including the government’s existing deficit programmes, this will lead to a total deficit of about 10% of GDP in 2009. In the UK, the government has proposed a package of £20b or 1.4% of GDP. Germany has just announced a fiscal stimulus plan of about 1% of GDP a year over the next two years. China has announced a 4 trillion yuan package of expenditures to be rolled out over the next two years. Taiwan government intends to spend 4% of GDP spread over four years.
7.These measures are widely regarded as mitigating the severity of the recession. But it is too early to say if they will help in bringing forward a recovery in the global economy.


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