1. Living with SARS: The Economic Consequences on Singapore Edward Robinson Economic Policy Department Monetary Authority of Singapore 2 August 2003

2. Outline of Presentation Business Cycles in Singapore The Economy Pre-SARS Diagnosis: The Q2 Impact from SARS Post SARS: The Initial Upturn Support Provided by Macroeconomic Policy

3. Business Cycles in Singapore

4. GDP Growth from 1980 Singapore’s Real GDP (LHS) Composite Foreign GDP (LHS) Global Chip Sales (RHS) 2003 Q2 (est.)

5. World Demand-Domestic Supply Curve DS 1 WD 1 WD 2 Price Level (Domestic currency) Real GDP Q1Q1 Q2Q2

6. Fall in External Demand Drop in Exports Businesses' Profit Margins Squeezed Cutback in Investment Spending Cutback in Labor Costs: Wage Cuts, Shorter Work Weeks, Retrenching Workers Private Disposable Income Falls Drop in Consumer Spending Consumer Sentiments Down Decline in GDP Dynamics of a Downturn

7. A Different Kind of Shock SARS: A Medical Emergency Direct Impact on Consumer Behaviour People Shun Crowded Places Negative Impact on Commerce Sector GDP Growth Globalisation Exposure to Foreign Risks

8. The Economy Pre-SARS

9. Recovery derailed by uncertainties… 2001 Downturn Trough = Q3 01 1998 Asia Financial Crisis Trough = Q3 98 1985 Recession Trough = Q4 85 Q2 2002 quarters

10. … as manufacturing output levelled off due to geopolitical uncertainties… Manufacturing Value-added Q3 01

11. The Q2 Impact from SARS… Verily I say unto you; where art thou, my patrons?

12. Four Stages of an Epidemic Timeline Acceptance  Up to 4 quarters  Public accustomed to epidemic  Fears dissipated  Partial resumption of economic activity  Intensive research on cure Possible Relapse  A few months Denial  Low public awareness  First fatality reported  1-2 quarters Impact/Fear  Greater public awareness  Fear factor  Economic activity disrupted  Heightened uncertainties & risk aversion  Stepped up measures to prevent the spread of the disease Recovery  Infection rate tapers off  Economic activity slowly returns to pre- crisis levels  Underperformance for several years before returning to trend

13. The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport

14. The outbreak had disproportionate impact on the various sectors… Tier 2: Significantly Affected Restaurants Retail Land Transport Tier 1: Severely Affected Hotels Air Transport

15. The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport Tier 3: Moderately Affected Real Estate Stock broking Tier 2: Significantly Affected Restaurants Retail Land Transport

16. The outbreak had disproportionate impact on the various sectors… Tier 1: Severely Affected Hotels Air Transport Tier 4: Less Affected Manufacturing Construction Post and Communication Wholesale Sea Transport Services Allied to Transport Tier 2: Significantly Affected Restaurants Retail Land Transport Tier 3: Moderately Affected Real Estate Stock broking

17. Tier 1 Travel Related Segments State in Apr-May: Critical Condition Visitor ArrivalsAir Passenger May

18. State in Apr-May: Weak Condition Tier 2 Domestic Oriented Segments Retail Sales Volume

19. Tier 3 Asset Markets State in Apr-May: Moderately Affected US (NASDAQ) US (DJIA) Singapore (STI) 2003

20. Domestic Demand-Supply Curve DS 1 DD 1 Price Level (Domestic currency) Real GDP Q1Q1 Q2Q2 DD 2 DS 2 Q3Q3

21. Deadweight Cost to Society Q3Q3 Q2Q2 DS 1 DS 2 DD 1 DD 2 Real GDP Price Level (Domestic currency) Q1Q1

22. Support Provided by Policy

23. Fiscal Support Expansionary Fiscal Policy off-budget packages Transport Industries $73.5m Courage Fund $14.8m Tourism-related Industries $155m

24. Monetary Support Conducive Monetary Conditions Low Interest Rates Flexible Mgt of S$

25. Support Provided by Policy DS 1 DD 1 Price Level (Domestic currency) Real GDP Q1Q1 DD 2 DS 2 A DS 3 B Q3Q3 Q4Q4 Q2Q2

26. Post-SARS: the Initial Upturn

27. Travel-related sectors saw a modest turnaround around end-Q2 Air Passengers Handled (LHS) Jun Visitor Arrivals (LHS) Hotel Occupancy Rate (RHS)

28. Manufacturing sector could see some recovery going forward Recession Unlikely, Q3 growth positive, Improvement in Sars hit sectors Index of Industrial Production (LHS) Non-oil Domestic Exports (RHS) Jun

29. Outlook for Growth Expansionary Fiscal Policy multiplier effect Support for the economy Easier Monetary Conditions Weak External Demand? 2 nd Wave of Infection? GDP Forecast Range 0.5 – 2.5%

30. Singapore hit by increasing frequency of shocks * Key Points * Sars was different in nature Medical Emergency Both DD/SS Effects Sectoral Specific Economic Resilience Strong Institutions Decisive Govt Response (Medical+Economic) Flexibility in Markets Social Cohesion

31. ~ Thank You ~