The Reform Party

Build Back Better, Fairer

Q2 GDP Slump: Reform Correctly Predicted This and Called for Stimulus Measures Ahead of Time

Published: 15th July 2014

The preliminary figures for Q2 2014 show the economy contracting at 0.8% on a quarterly annualized basis while the manufacturing sector (which accounts for nearly 18% of the economy) contracting at nearly 20% on the same basis.  The slump would have been much worse if it had not been for a surprising acceleration in services growth.  News reports said that neither the Government nor private sector economists saw this coming. Yet Reform was ahead of the curve in both predicting the downturn and calling for fiscal measures to counteract it.

 In April 2014 Reform Party predicted that slowing growth in 2014 made the need for additional stimulus measures, on top of those announced in Budget 2014, urgent.  This followed advance Q1 2014 GDP figures which showed the economy expanding by just 0.1% on a quarterly annualized basis. We called for a stimulus of about 0.7% of GDP to consist primarily of cash rebates to the bottom 70 percent of Singapore citizen household members with a progressive structure (see link) so that the lowest income households benefited most. This was primarily on equity grounds though also on the basis that households on low incomes would have  spend more of any additional income and thus measures targeted at this group would be likely to more effective in stimulating the economy. We estimated the total initial cost of our stimulus package to be around $2.5 billion but part of this initial outlay would be recouped in higher tax collections as spending rose.  The proposed stimulus was less than 10% of the published General Government Cash Surplus of around $30 billion per annum.

On 27 June 2014 we repeated our call for stimulus measures after poor manufacturing output growth figures were announced (see link). Due to the increased urgency of the economic situation we called for the stimulus to be raised by 50% for the bottom 50% of Singapore citizen household members. We estimated total costs to be around $4 billion, or just over 1% of GDP, though increased tax receipts from higher output would recoup part of the cost.

The Government has ignored our calls yet the economic situation has continued to deteriorate.  For the record we repeat for the third time Reform’s call for stimulus measures of at least 1% of GDP.

The Government has attempted to portray the downturn as a result of economic restructuring measures to reduce the economy’s dependence on cheap foreign labour. However if that were the case we would see accelerating productivity growth as companies shed low productivity labour. We have not. Despite wasteful corporate subsidies, which have been widely abused, such as the Productivity and Innovation Credit, productivity growth has slumped. Figures for 2012 and 2013 show labour productivity falling by 2.6% and 0.2% respectively.  After a recovery in Q1 2014, the figure for Q2 will be negative as well.

This is instead an old-fashioned recession caused by lack of demand. While there has been a global slowdown, particularly evident in the EU and China, Singaporean exports have suffered disproportionately compared with other Asian competitors. We still have too much of the economy concentrated in manufacturing compared with the levels in other first world cities and too much of that is in low value-added labour-intensive industries. By comparison manufacturing only comprises 2% of Hong Kong’s GDP.

Far from restructuring the economy the PAP are unwilling or unable to move away from their outmoded development model reliant on cheap labour and rapid population growth. The persistence in sticking to this model is evidently connected to problems elsewhere in the economy, such as the illiquidity of Temasek’s and GIC’s investments and the need to generate continued inflows into CPF and also sustain HDB’s valuations.

The PAP is fond of sowing doubt in Singaporeans’ minds by asking whether the Opposition are ready to take over. This is the wrong question. The Government are both incompetent and asleep.  You need to be asking yourself instead whether you can afford another five, let alone fifty, years of PAP rule.