Global economic situation remains dire, substantial uncertainty ahead: MAS chief Ravi Menon

• MAS’ managing director Ravi Menon said the economic situation remains dire
• A lot of uncertainty in global economy as trajectory of Covid-19 is unknown 
• Recovery over the long term is likely to be weak and gradual, uneven across countries and sectors
• Construction, travel-related and customer-facing domestic services at epicentre of Covid-19 fallout
• MAS’ profit fell 45 per cent to S$10.6 billion in Q1 as a result of the decline in global markets

SINGAPORE — The global economy is heading for a recession unlike any other, with “substantial uncertainty” in the months ahead as countries reel from the devastating impact of the Covid-19 pandemic, said Monetary Authority of Singapore (MAS) managing director Ravi Menon. 

And Singapore, which is seeing its most severe economic downturn since independence, will feel the effects of this. 

The trade-reliant economy already contracted 6.5 per cent in the first half of 2020, with construction, travel-related and customer-facing domestic services bearing the brunt of the fallout. 

Speaking at the release of the MAS annual report on Thursday (July 16), Mr Menon said: “The economic situation remains dire. We are not at the beginning of the end, but rather at the end of the beginning.” 

Unemployment and corporate bankruptcies will rise, and individuals and companies will have higher levels of debt, he said. 

The global economic contraction in the second quarter of this year is likely to be even deeper than in the first quarter as this is when many economies outside of China were most severely affected by the coronavirus outbreak, with many implementing lockdowns to contain the spread, added Mr Menon.

The global economy already registered a 14 per cent quarter-on-quarter decline in the first quarter of this year — almost three times the sharpest decline seen during the 2009 global financial crisis. 

The MAS expects the global economy to grow by 3.5 per cent in the second half of this year, after contracting by about 5.5 per cent in the first half. 

Despite these predictions, Mr Menon said there will still be “substantial uncertainty”, mainly because nobody can predict the trajectory of the Covid-19 pandemic. 

“If there are new waves of infection, it could lead to a return of containment measures that drag down economic activity again. Even if subsequent waves of infection are more limited, it is not clear if confidence in resuming normal economic activities will return fully. It is also not clear to what extent the destruction unleashed by the pandemic in the first half of this year has damaged the productive capacity of economies,” he said. 

WEAK RECOVERY 

While the global economy will recover, it is likely to be weak and gradual over the long term even though a short-term growth bounce could occur, noted Mr Menon. 

People may be hesitant to return to previous patterns of work out of fear of the virus, he said.  

Many may also tighten their purse strings as a result of job and pay cuts, while businesses are likely to hold back investments. 

“There may be lasting shifts in demand patterns and the associated disruptions in business activities. Changes in supply chains – with a shift in emphasis from efficiency to resilience – may also exert a drag on economic recovery,” said Mr Menon. 

Any recovery will be uneven across countries, industries and time, he added. 

Despite its first-ever economic contraction in close to 30 years in the first quarter, China is still expected to grow by about 1 per cent this year, making it the only large economy to expand. 

The Eurozone economy as a whole is expected to shrink 9 per cent while the outlook for the United States is mixed, said Mr Menon. 

Meanwhile, the economies of Indonesia, Malaysia, Philippines, Thailand and Vietnam are projected to contract by 2.6 per cent. 

OUTLOOK FOR SINGAPORE 

In Singapore, the sectors worst hit by the pandemic — construction, travel and customer-facing domestic services — each make up about 4 per cent of the city-state’s gross domestic product (GDP). 

This means that about 12 per cent of the economy is at the epicentre of the Covid-19 pandemic, said Mr Menon. 

These worst-hit activities will take time to recover and even if there is growth in the second half of this year, it will not be enough to restore them to levels before the crisis, he said. 

As for trade-related services, a strong demand for pharmaceutical products could offset some weak external demand and disruptions in global supply chains.

Meanwhile, growth in modern services, which include ICT and financial services, is likely to slow down, he said. 

While a slowdown is expected in the financial services sector, it is not expected to cross into negative territory. 

The financial services has emerged relatively unscathed from the Covid-19 crisis, growing 5 per cent in the first half of this year, faster than the 4.1 per cent growth in 2019. 

The total number of jobs in the sector actually grew by 2,200 and there has not been any increase in retrenchments thus far. 

“It is encouraging that some major financial institutions have committed not to shed any workers due to the Covid-19 crisis. For the year as a whole, MAS expects the financial services sector to still be a net creator of jobs, albeit much lower than in previous years,” said Mr Menon. 

Mr Menon reiterated the Government’s official forecast of Singapore’s economy shrinking by between 4 and 7 per cent this year, with core and headline inflation coming in at between -1 and 0 per cent. 

When asked during a press conference on whether the forecast range could be revised, Mr Menon said that both upward or downward revisions are possible. 

A worse-than-expected contraction could happen if there is a serious second wave of Covid-19 infections and many countries go into lockdowns. 

On the flipside, some industries might experience strong V-shaped recoveries. 

However, Mr Menon said the key point is not to focus on the forecast range but to ensure that unemployment and business closures remain as low as possible. 

“Even if the growth rates pick up in the second half, and they will pick up in the second half, that tail effect of what we just went through will mean corporate bankruptcies will rise in the second half. Again, some of that is inevitable, some of that is a natural part of how the economy adjusts and restructures so that resources flow into new areas,” he said. 

“We want to make sure that process is well managed and orderly... But if it gets very large, disorderly and it creates a lot of dislocation — supply chains, worker layoffs and so on —  then it's a serious problem.” 

MAS’ FINANCIAL PERFORMANCE 

For the financial year of 2019 and 2020 ending March 31, the central bank made a net profit of S$10.6 billion — a 44.8 per cent decline from the S$19.2 billion profit it made in the last financial year. 

The decline was mainly due to lower investment income arising out of a “sharp decline in the global markets” in the final quarter of the year, said MAS in its annual report. 

Half of its profit, amounting to S$5.3 billion, will be returned to the Government while the rest will be added to MAS’ reserves, said Mr Menon.