The Singapore economy slipped into a recession in 1998 as a result of the regional economic crisis. Growth for the whole year, however, remained positive at 1.5%. The sharp slowdown from the 8% registered in 1997 can be attributed to three key factors. First, deepening recessions in 1998 in most parts of Asia led to a slump in Singapore’s external demand. Non-oil domestic exports and re-exports to these Asian markets shrank by 10% and 13% respectively. Second, erosion of our cost competitiveness as a result of the sharp depreciation in the regional currencies exacerbated the decline of our exports. Third, global over-capacity in the electronics industry contributed to the decline in the manufacturing sector.

However, the economy picked up modestly in the first quarter of 1999 to register a growth of 1.2%. Growth momentum was robust on the back of strong growth in the manufacturing sector. The transport and communications sector also improved slightly, boosted by an increase in visitor arrivals. Nonetheless, the other major sectors, namely, construction, commerce, and financial and business services, declined in the first quarter.

The manufacturing sector shrank by 0.5% in 1998, against growth of 4.5% a year ago. Support for the sector came largely from strong growth in the chemicals industry, on the back of restructuring and capacity expansion in the pharmaceuticals segment and steady expansion in the petrochemicals segment. Most of the other industries performed poorly. Although initially shielded from the regional storm by a nascent recovery in the global electronics cycle and healthy demand in the US and EU economies, the electronics industry was later affected by excess capacity in semiconductors and disk drives.

In the first quarter of 1999, however, the sector grew by 6.5%, after contracting for the previous three quarters. The electronics industry saw a strong turnaround, expanding by 14%. Stronger demand from the United States saw output of computers and computer peripherals rise. The semiconductor segment also rose as oversupply receded with the pickup in the global electronics industry. The chemicals products industry grew by 19% with increases in both the petrochemicals and pharmaceuticals segments. However, the other industries like machinery and equipment, fabricated metal products and rubber/plastic products, and electrical machinery and apparatus continued to contract.

Activity in the construction sector moderated to 3.9% in 1998, compared to a robust 15% a year earlier. The sector contracted by 9% in the first quarter of 1999, significantly sharper than the 5.3% decline registered in the previous quarter.

The commerce sector performed poorly in 1998, shrinking by 4.0% in 1998, down from a growth of 5.7% a year earlier. Entrepôt trade contracted in line with slower regional growth, while domestic trade was affected by the fall-off in visitor arrivals, bearish consumer sentiment and belt-tightening in the face of increased economic uncertainty. In the first quarter of 1999, the commerce sector showed some improvement along with the bottoming out in domestic and regional economies. The sector’s contraction moderated to 2.1% in the first quarter of 1999, from -6.3% in the preceding quarter.

The transport and communications sector turned in a healthy growth of 5.5% in 1998, with support coming from a relatively resilient communications segment and a modest year-end recovery in air transport. Helped by the pick-up in manufacturing, as well as improved visitor traffic, the sector grew by 5.7% in the first quarter of 1999, higher than the 4.7% of the preceding quarter.

The financial and business services sector grew by a modest 3.1%, down from 11% a year earlier. In the first quarter of 1999, the sector contracted by 0.6%. The financial services sub-sector shrank sharply by 5.3%, after a 0.5% decline in the last quarter of 1998, partly due to a high base a year ago. The decline was also due mainly to poor lending sentiment to non-bank customers in the domestic and offshore markets.

Consumer prices fell by 0.3% in 1998, marking the first annual decline since a 1.4% contraction during the last recession in 1985/6. A firm exchange rate vis-à-vis regional currencies, muted inflationary pressures in international commodities, cautious consumer sentiment and very competitive pricing in the face of weak retail demand from both locals and visitors helped to lower prices.

Consumer prices continued to decline in the first quarter of 1999, falling by 0.6% on a year-on-year basis. The decline was mainly due to lower costs of transport and communications, as well as housing costs.

The labour market slackened considerably in 1998. The average unemployment rate rose to 3.2%, up from the average level of 1.9% over the past nine years. Total employment chalked up a net loss of 23,400, the first full-year decline in employment since the 1985/6 recession. This compares with net employment gains of 120,300 in 1997. With the sharp fall-off in business demand and the consolidation of local business operations, the number of retrenched workers reached an all-time high of 29,100 in the year, exceeding the 19,529 retrenched in 1985. The manufacturing sector, particularly the electronics industry, bore nearly two-thirds of the lay-offs. The services sector accounted for 30% of the retrenchments, mainly in wholesale and retail trade, real estate and business services, hotels and restaurants and financial institutions.

The labour market remained weak in the first quarter. Total employment is estimated to have contracted by 17,800, compared to a decline of 6,300 in the fourth quarter of 1998. The largest net job loss was in the construction workforce, followed by commerce, manufacturing, financial and business services and transport and communications. About 2,800 workers were retrenched in the first quarter, a significant drop compared with the 8,013 laid off in the preceding quarter. In line with the pick-up in the manufacturing sector, only 28% of the total retrenched workers were from the manufacturing sector. This is a sharp contrast to previous years where manufacturing accounted for more than two-thirds of total retrenchments. Instead, the majority of the workers laid off were from the services sectors (61%), namely, in financial institutions, wholesale and retail trade, real estate and business services and hotels and restaurants. The seasonally adjusted unemployment rate eased to 3.9% in March 1999, from 4.4% in December 1998, partly due to the pick-up in economic activity and a drop in retrenchment in the first three months of this year.

Singapore continued to register a current account surplus in 1998. The surplus rose from S$22.3 billion in 1997 to reach S$29.5 billion in 1998. This was largely due to the improvement in trade balance as a result of a fall in imports. The current account continued to register a surplus of S$6.9 billion in the first quarter of 1999.

Against the backdrop of the Asian financial crisis, the Singapore dollar weakened against the major currencies, but strengthened against most regional currencies in 1998. Despite some volatility in the movements of the Singapore dollar against the US dollar, the Singapore dollar depreciated by an average 11% against the US dollar, following a depreciation of 5% the previous year, ending the year at S$1.66 per US dollar. On the other hand, the Singapore dollar strengthened against the regional currencies as they continued to slide against the US dollar, particularly in the first three quarters of 1998. It appreciated by 210% against the Indonesian rupiah, 32% against the Korean won, 20% against the Thai baht and 3.5% against the New Taiwan dollar. It also appreciated by 25%% against the ringgit to end the year at S$0.44 per ringgit. However, the Singapore dollar depreciated against the currencies of most industrialised countries in the first quarter of 1999. It weakened by 6.1% against the Japanese yen, 3.4% against the US dollar, and 0.9% against the Pound Sterling. The Singapore dollar also depreciated against most regional currencies. It weakened by 9.6% against the Korean won, 3.1% against the Thai baht, and 3.4% each against the Hong Kong dollar, the New Taiwan dollar and the Malaysian ringgit. Against the rupiah, the Singapore dollar strengthened by 5.4%.

Fiscal policy in 1998 continued to be aimed at supporting sustained, non-inflationary economic growth. Against the volatile regional setting, the government responded with further fiscal measures, following the fiscal year 1998 (FY98) budget, to cut business costs and stimulate the economy.

Although both the government’s operating revenue and operating and development expenditures declined, the former for the first time in many years, revenues remained sufficient to finance expenditures. The decline in government expenditure was largely the result of civil service variable wage adjustments in line with a policy of wage restraint, and softening tender prices and construction costs.

While the government observes a balanced budget to ensure that it lives within its means, it is not opposed to incurring temporary budget deficits and drawing on its accumulated surpluses to implement essential relief measures to ameliorate the impact of an economic downturn, as well as to continue infrastructural investments. Nonetheless, the objective remains to return to a balanced budget as quickly as possible and to maintain a balanced budget over the medium-term.

The key priorities in government expenditure are to promote economic growth, and to develop and nurture the human resources of the nation. Hence, expenditure priorities are aligned with strong emphases on education, economic infrastructure, basic health and national security. As in previous years, the bulk of expenditure in 1998 was allocated to social and community services (38%), comprising mainly education and health, and security (34%). Economic services accounted for another 21%. At the same time, funding for the arts was increased by 22% to encourage greater appreciation of culture and the arts.

In all, total expenditure in 1998 amounted to S$24.8 billion, a decrease of S$1.1 billion or 4.1% over 1997. As a percentage of nominal GDP, it remained largely unchanged at 18% in 1998. Operating revenue totaled S$28.2 billion, down by S$2.4 billion. The result was a fiscal surplus of S$3.4 billion (or 2.4% of nominal GDP), S$1.3 billion less than the S$4.7 billion surplus in 1997. The budget surplus, which took into account contributions to the Central Provident Fund (CPF) Pre-Medisave Top-up Scheme, stood at S$3.4 billion.

Despite the budget surplus of S$3.4 billion for the calendar year 1998, the budget for the fiscal year (FY98) registered a slight deficit of S$0.5 billion. This is due mainly to the slowdown in revenue collections as a result of the S$2 billion Off-Budget package in June 1998 and the S$10.5 billion cost-cutting package in November 1998.

The cost-cutting package implemented in January 1999 resulted in a significant easing of cost pressures in the first quarter. Helped by wage cuts and healthy productivity growth, the Unit Labour Cost (ULC) of the overall economy fell by 10% in the first quarter. Manufacturing Unit Business Cost (UBC) fell by 13% in the first quarter, more than the 4.4% decline in the preceding quarter. Besides the 17% drop in the ULC of the manufacturing sector, services costs declined by 6.9% due to lower charges for various services, namely, trade and transport, interest and financial services, utilities, rental of premises, telecommunications, port and warehousing. The government rates and fees component of the UBC also fell by a hefty 38%, due to the continued fall in industrial property prices and property tax rebates for industrial properties.

Monetary policy remained focused on maintaining price stability as a sound basis for sustained economic growth. This objective was achieved through an exchange rate policy aimed at price stability and sustainable growth.

In 1998, in response to the increased volatility and uncertainty of financial markets, the band within which the Singapore dollar can fluctuate has been widened. The subdued inflationary environment has also allowed the Monetary Authority of Singapore (MAS) to manage the exchange rate more flexibly. In 1998, although the Singapore dollar weakened against the US dollar, it appreciated against the currencies of most regional economies. Hence, against a trade-weighted basket of currencies of the major trading partners, the Singapore dollar appreciated slightly in 1998.

In the first quarter of 1999, the Singapore dollar continued to depreciate against the currencies of most industrialized countries (with the exception of the Euro which was launched on 4 January 1999). In addition, the Singapore dollar fell against most regional currencies, with the exception of the rupiah.

The manufacturing sector attracted a healthy total of S$7.8 billion of investment commitments in 1998, despite the economic crisis. Foreign investors, led by the US, and followed by Japan and Europe, displayed their confidence with a commitment of S$5.2 billion. The commitments were mainly in the electronics and chemicals industries, with projects including wafer fabrication, semiconductors, petrochemicals, DRAMs, CD-ROMs and capacitors.

Manufacturing investment commitments totaled S$1.7 billion in the first quarter of 1999, of which 88% were from foreign sources, namely, Europe, the US and Japan.

The global economic climate has improved in the last few months, although uncertainties remain. Bolstered by the lagged effects of the interest rate cuts late last year and strong consumer sentiment, the US and EU economies are likely to continue growing, albeit with some moderation. The Japanese economy, propped up by expansionary fiscal measures and monetary policy, is showing signs of being on the mend. The regional economies are bottoming out, although the turnaround in the real economy remains patchy.

In Singapore, the economy registered positive growth in the first quarter, largely on the back of a strong pick-up in the manufacturing sector. The transport and communications sector also improved slightly, boosted by an increase in visitor arrivals. Forward-looking indicators such as the composite leading index and business expectations have improved somewhat. However, a number of sectors remained weak. The construction, commerce and financial and business services continued to decline in the first quarter.

The overall optimistic sentiment masks the latent risks in the global economy. The recent strength in industrial production and our exports to the regional economies are heavily reliant on the continued strength of the developed economies, in particular, the US. Despite its current dynamism, potential stress points still exist in the US economy. The sustainability of high rates of economic growth in the face of a tight labour market and rising trade deficit remains a challenge. In the EU, growth is expected to moderate this year as stock-building unwinds and investment growth slows in response to more cautious business sentiment. The convalescence of the Japanese economy also remains fraught with challenges. In the region, even as countries take on the painful tasks of restructuring and reforms, socio-political stresses could potentially jeopardise recovery in their economies. Hence, the external outlook, while improved, remains fragile.

Taking into account all the above factors, the 1999 GDP growth forecast for Singapore has been revised from -1% to 1% to 0%.

Source: Data are as submitted by member economies, unless otherwise specified. Data for 1998 are from Asian Development Bank and International Monetary Fund.

Table 2. Forecasting Summary (% change from previous year)

Note: The IMF forecast is from the World Economic Outlook (IMF, April 1999). The ADB forecast is from the Asian Development Outlook (1999).