Measures won't stave off recession but will contain damage: economists

Singapore

THOUGH the larger-than-expected S$48.4 billion Resilience Budget will not stave off recession, it will help to contain job losses and position Singapore better for an eventual recovery, said economists.

This fiscal boost has not reduced the need for strong monetary action, with Singapore's dismal growth forecast instead raising expectations that the Monetary Authority of Singapore (MAS) will both flatten and re-centre the policy slope on Monday.

Unveiled on Thursday, the same day that Singapore's full-year growth forecast was lowered to between -4 per cent and -1 per cent, the supplementary budget has a "very clear message", said HSBC Asean chief economist Joseph Incalcaterra. "The government will do whatever it takes to support the labour market." (see amendment note)

A large part of the package is for enhancements to the Jobs Support Scheme, with a total of S$15.1 billion going towards supporting more than 1.9 million local employees through wage offsets. Such wage subsidies were effective in preventing a more severe domestic downturn in 2009, said Mr Incalcaterra. But while these and other measures may prevent a spike in job losses, "they are unlikely to be sufficient in preventing the economy from slipping into a sharp recession", he added.

As Deputy Prime Minister and Finance Minister Heng Swee Keat himself said on Thursday, even with the Resilience Budget, "we cannot prevent an economic recession as the external health and economic situation will evolve beyond our control".

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Other economists similarly point to the inevitability of recession, and the role of the package in supporting firms and households through it. Expanded financing options "should help to ensure enough liquidity to sustain companies during this crisis", said DBS senior economist Irvin Seah, whose full-year growth forecast is -2.8 per cent.

Citi economists Kit Wei Zheng and Ang Kai Wei, who have the same growth forecast, said: "By reducing the risk of large-scale corporate bankruptcies and job losses, the package likely better positions the economy for eventual recovery, and reduces the risk that a transitory shock from the virus becomes permanent."

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye think the support "will reduce job losses and the extent of unemployment, but will not be able to lift GDP growth or the corporate revenue line".

They expect the resident unemployment rate to climb to around 3.5 per cent from the current 2.3 per cent, with job losses of 40,000 to 50,000 for the year.

"The lifeline may be sufficient for six to nine months but if the world and Singapore remains in recession in Q4, another fiscal package may be necessary," they added.

The Resilience Budget's increased cash handouts to Singaporeans provide some assurance to consumers, said OCBC Bank chief economist Selena Ling, who hopes this will provide some support for the services sector. As for what more could be done, she suggested higher wage offsets for retail, but added that "perhaps the government is reserving some things for the third package if there needs to be one".

Mr Heng himself noted that the government is prepared to propose further draws on past reserves to fund more measures, if needed. In the meantime, economists agreed that the fiscal move must be complemented by monetary action.

Bank of American Global Research said in a report on Friday: "Given very large leakages and low propensity to consume, fiscal multipliers are very small, with every one per cent fiscal impulse estimated to boost growth by a small 20 basis points."

"Rather than reducing the burden on foreign exchange policy to support the economy, the severity of the recession suggests foreign exchange policy will more likely be expected to step up to share that burden," said Barclays economist Brian Tan.

He expects the Singapore dollar nominal effective exchange rate policy band to be both flattened to a zero slope, and re-centred lower by 200 basis points in the MAS's half-yearly policy decision on Monday.

Mr Incalcaterra, who has similar expectations, said Thursday's "aggressive fiscal response... gives us confidence that the MAS will similarly do something unprecedented on March 30 in coordination".

Amendment note: An earlier version of this story made reference to the Resilience Budget being unveiled on Tuesday. The Resilience Budget was unveiled on Thursday.

READ MORE: S$48b support package to be reviewed nearer year end: PM Lee