This report includes the
background of Singapore’s current state of economy, its Unemployment trend,
including concepts of Business Cycle, the country’s Gross Domestic Product
(GDP), and lastly the Inflation situations in Singapore.
1.1 Background of Singapore’s Economy
Over the years, Singapore’s
economy shows signs of improvement. Singapore has an open and outward-oriented development strategy, which is a
strategy that allows the economy to be opened to the world in terms of trade
and investment. This allowed Singapore to achieve a strong economic performance
as the policies turned out to be very successful. Singapore’s economy is in
fact, rated the most open in the world.
Singapore’s political steadiness, outstanding telecommunications and
infrastructure, strategic geographical location and a talented and
knowledgeable workforce have contributed to Singapore’s swift development into
a dynamic business and financial hub in Asia.
In 2017, Singapore was ranked number 11 for the highest GDP per capita.
The GDP grew over the years, from USD 0.70 billion in 1960 to USD 296.98
billion in 2016, showing that the country developed rapidly as time passes.
Inflation and unemployment rate remained low at about 2-3% per annum during
this period. Hence, we are
conducting an in-depth analysis of this country with a growing economy. Let’s
start by analyzing Singapore’s Unemployment rate, together with concepts of the
2.0 Unemployment and Business Cycle
Unemployment rate calculates to
the number of adults above the age of 15 who are able and willing to work but
have not found a job yet despite actively seeking employment. Unemployment rate
is the proportion of the labour force who are unemployed. It is an important indicator of a
country’s economy as it indicates how well the country is using its existing
resources to produce at its potential GDP.
In 2017, the labour market
showed signs of recovery in the third quarter with an overall lower
unemployment rate and slight drop in retrenchment. In September, it dropped by
0.1% from 3.3% to 3.2% and in June, it dropped by 0.2% from 3.5% to 3.3%.
However, Ministry of Manpower (MOM) stated that the unemployment rate for
residents might be hard to reduce further in the medium term because of the
economic restructuring and mismatch between jobs available and worker’s skills.
This means that there will be an increase in structural unemployment, when
workers require additional training and education to regain employment. Since
companies are going through restructuring, they have dismissed 19,800 workers
since end of 2016. This is majorly due to decrease in work permit in the marine
and construction sectors as there as low oil prices and less construction
The decrease in unemployment
could also be due to the creation of better jobs and increase in demand of
export goods. Therefore, it led to an increase in the labour workforce which
drives the output of the nation. This encourages economy growth of the nation,
and improving the real GDP. With
more employed citizens, the standard of living in the country is raised since
more people now have a stable income. With more people having stable income,
their purchasing power rise due to an increase in disposable income. This leads
to them consuming more, contributing to the economic growth of Singapore by
increasing the GDP.
The government has encouraged
the labour force to upgrade their skills through Workforce Training Support and
SkillsFuture. These schemes offer them an opportunity to take up a part-time Diploma, Advanced Diploma,
Specialist Diploma and Diploma (Conversion) programmes and courses. This
ensures that workers remain employable and relatable to the current jobs
available and less likely to lose their jobs as improvements in technology
render some jobs obsolete.
Since the unemployment rate is
below 5%, Singapore is operating at full employment. It is impossible to
achieve zero unemployment because there will always be some frictional,
seasonal and structural unemployment which is part of natural rate of
preserve its international standing and further its economic prosperity in the
21st century, Singapore has taken measures to promote innovation, encourage
entrepreneurship and re-train its workforce. This eases structural
unemployment, allowing the workers to return to the workforce after re-learning
to keep up with the requirements of the current jobs.
2.1 Business Cycle
Since there has been a constant
decrease in unemployment rate and increase in real GDP, it is evident that
Singapore’s economy is going through “recovery”. From October 2017 till
December 2017, the economy has expanded 3.1% thanks to the strong growth in the
manufacturing sector. Although some sectors are not performing as well, we
persevere on the growth of trade-related businesses which were mainly from the
continued strength in the global electronics cycle (Refer to Appendix, Figure
1). This offset the underperformance of other sectors.
The GDP has expanded by an
average of 4.4% quarter-on-quarter in Quarter 2 and 3 in 2017. Several sectors
such as retail and financial services, experience positive developments while
some such as modern services and domestic-oriented clusters remain stagnant.
However, the IT-related segments showed a large improvement. Therefore, the
economy expansion of 2% to 3% is expected to remain constant in the year 2018.
With the increasing pick-up in
manufacturing activity since 2016, business profits have improved, and
production capacity is more utilized, leading to an increase in the country’s
GDP, putting Singapore on a “recovery” state in the business cycle.
3.0 GDP Of Singapore
The most widely accepted way to
determine a country’s economy is by looking at its Gross Domestic Product (GDP):
The total monetary value of all the goods and services produced within a
geographical boundary of a country over a period of one calendar year. It
measures how well a country is doing as well as the health of its economy.
Based on Appendix, Figure 2, from
2007 to 2016, the GDP of SG fluctuates and 2014 has the highest GDP of USD
308.14 billion. Singapore’s GDP was greatly affected by the Great Recession
that began in December 2007 and ended in June 2009, as seen from the graph
where Singapore’s GDP is at its lowest at USD 179.98 billion in 2007 compared
to other years. The GDP increases steadily from 2007 to 2014, where it reaches
the highest GDP at USD 308.14 billion, before decreasing slightly at 2015 and
increasing slightly again at 2016. The country’s GDP is still growing,
evidently shown in the graph.
However, the GDP figure may be
slightly unreliable due to the fact that certain measures of overall economic
well-being are being omitted, including non-market transactions, a small but
present underground economy and the neglect of leisure time, as well as the
negative externalities while producing goods.
3.1 Economic Growth
Singapore’s economy is growing
year on year due to an increase in demand of goods and services when the
government and consumers increase in consumption. Hence, Singapore has an
average increase in output every year, boosting the country’s economy.
Economy growth refers to the %
change in the monetary value of the Real GDP, on a yearly basis or quarterly
basis. Singapore’s economy grew by 3.1% year on year in the fourth quarter in
2017, slower than the 5.4% growth rate in the third quarter. However, in the
year 2017, the overall GDP grew by 3.5%, falling within the Ministry of Trade
and Industry’s estimation, which is within 3.0% to 3.5%. The growth is credited
to the increased output expansions in the electronics and precision engineering
clusters, outweighing the output declines in the biomedical manufacturing and
transport engineering clusters.
Furthermore, the increase in GDP
is due to Singapore’s exports in manufactured products. From what we learned in
Macroeconomics, an increase in exports would lead to an increase in the
country’s GDP. Singapore’s exports focus more towards locally produced
electronic exports, like diodes and disk media products, as well as non
electric exports, like chemical and biochemical exports. Singapore also
purchase raw goods and refine them to re-export the goods, like the water
fabrication industry and oil refining. This boosts the country’s GDP.
3.2 GDP Per Capita
GDP per capita refers to average
GDP per person and indicates the living standards of a country.
There was a drastic decrease in
GDP per capita from 2008-2009 due to the Global Financial Crisis (Refer to
Appendix, Figure 3). The GDP per capita increases gradually from 2010-2016,
showing that Singapore’s workforce is efficient and productive and that the
living standards of Singapore is satisfactory and constantly improving.
One factor that causes GDP, and
GDP per capita to be inaccurate is the presence of Non-Market Transactions:
“DIY” Activities such as washing your own car or helping a family business
without being paid. Since these activities are done without transactions made
yet involve labour, these activities cause the GDP to understate the wellbeing
of the country’s citizens.
Another factor is the
underground economy, which refers to illegal activities such as drug
trafficking and gambling. It also includes unreported legal activities such as
unreported home tuition, and barter trade since no money is involved. This thus
causes the GDP to understate the economic wellbeing of the country.
The third factor is the
distribution, kind and quality of products. Since GDP per capita only shows the
average income, it does not take into account differences in income between the
rich and poor, which is an inaccurate representation of the economic wellbeing
of the country. GDP also does not in any way show the kind or type of products
being made as it is a qualitative not quantitative way to measure the output of
goods and services. Thus, GDP is not a true reflection of the quality of
products made in the country.
GDP does not directly measure
quality of life or “happiness” variables such as leisure time so it understates
the quality of life of the country.
Lastly, GDP does not take into
account economic bads such as pollution and environmental damage which are
negative externalities of output of goods. In other words, since the cost of
the negative byproducts of goods produced in the country is not documented, GDP
overstates the national wellbeing.
In economics, inflation refers
to a sustained and continuous increase in the general price level over a
significant period of time in an economy. When an economy experiences
inflation, purchasing power of goods and services decreases. Inflation also has
the ability to erode the purchasing power of money due to the fact that general
prices are steadily increasing over a period of time. Inflation occurs when
there is a mismatch of the demand and supply of goods and services. This may be
due to demand-pull inflation from consumers and cost-push inflation due to the
high costs of production. Demand-pull inflation occurs when there is an excess
demand, and there are insufficient goods to meet the demand. Sellers then
respond by raising the price of the goods. Cost-push inflation is caused by an
increase in the cost of production spent producing the goods and services. To
protect their profit margins, sellers raise the price of the products to match
the rising price of the cost of production.
Consumers are typically the ones
being affected by the impact of inflation. High priced goods and services makes it tough for consumers
to afford basic necessities, like food, transport, as well as education. This indirectly causes consumers to demand for
higher wages. Therefore, Singapore’s government tries to keep inflation under
control by monitoring the inflation rate constantly to strive to maintain the
Inflation is inevitable in any
country’s economy and to prevent inflation rate from getting too high, the
government tries to maintain a favourable inflation rate in the economy by
reducing consumption so that consumers are still able to afford the goods and
services and prevent the economy from going into a recession. Singapore
government tries to achieve a favourable inflation rate of below 5%, where
price levels are suitable for consumers to purchase basic necessities and
companies to borrow money to increase investment, leading to an economic growth
with the increase of output of goods and services.
4.1 Inflation in Singapore’s Economy
According to the article, there was a projected rate
of inflation of 1.3% in 2018. This is due to the continuous increase in rate of
inflation and the nominal salaries of the workers staying flat. Therefore, in
2018, there will be a nominal salary rise of 4% and an increase in real income
by 2.7%. Due to the projected rate of inflation at 1.3% in 2018, an increase in
both nominal and real salary is needed to offset the increase in the inflation
rate. As compared to other developed Asian countries like Hong Kong, the
increase in salaries are much higher, showing that Singapore’s economy is
performing well and doing better compared to previous years. “In comparison,
last year’s survey predicted a real wage increase of 2.9 per cent in 2017 after
taking into account inflation of 1.1 per cent.” Hence, inflation rate will only
get higher as workers are earning more and as economy is doing better.
As Singapore’s economy continues
to perform well, the growth in employees’ wages will cause power of purchasing
money to increase, increasing the demand for goods and services increases as
they are willing to consume, which would probably drive demand-pull inflation.
In November 2017, according to
MAS, the inflation rate rose to 0.6% from 0.4% in October 2017, exceeding
market expectation of 0.5%. This is due to a rapid increase in the cost of
transport as well as the prices of food. The increase in cost of both
transportation and food is caused by cost-pull inflation. The cost of
transportation is due to higher car prices together with an increase in
Certificate of Entitlement (COE) premiums, as well as expensive petrol prices.
The increase in prices of food is caused by an increase in prices of non-cooked
food items like cornflakes, as well as more expensive hawker centre and
restaurant food, leading to an increase in the prices of food.
4.2 Core Inflation
Core Inflation refers to the
measures of the long run trend in the increase of price levels, of goods and
services, excluding the costs of private road transport and accommodation.
According to MAS, the core inflation rate dropped from 1.6% in the second quarter
of the year 2017 to 1.5% in August 2017. The article stated that “The decline
in measure of inflation was largely due to smaller year-ago price increases for
oil-related components”, the reason behind the drop in the inflation rate.
Simply put, the main reason causing a lower core inflation rate is that the
increase in prices of oil components are lesser than the previous quarter. This
means that the costs of producing oil became lower. Employees working for the
oil companies will receive lower salaries and hence, the oil supplies are sold
at a lower price to ensure that producers do not lose customers and are still
able to sell oil supplies, causing inflation rate to be lower than the previous
Due to lower inflation rate,
more oil companies are able to buy their materials at lower prices, increasing
the production of more oil and contain greater quantity of supplies. With
greater quantity of oil produced, they are able to export it to other
countries, allowing Singapore’s economy to gain more income based on their
exports. Hence, imports in Singapore’s economy increases along with the demand
for more imports as article stated, “On the external front, imported inflation
is likely to rise mildly, as global demand improves amid ample supply in key
commodity markets”. “Oil prices have fluctuated within a fairly narrow range
over the first nine months of this year, and are expected to increase only
slightly in 2018 compared to 2017.
4.3 Government Interventions to Curb Inflation
To combat the rate of inflation
from going higher than expected, the government, playing the most vital role,
steps in and take preventive measures to bring the inflation rate to its
optimum rate. High inflation rate is caused by the high costs of imports and
production in the economy. Hence, the government works its way around by
implementing policies and coming up with training schemes that will effectively
bring down the inflation rate.
The government attempts to keep
the costs of prepared food affordable. Singapore has a very limited number of
food manufacturing companies and compared to other countries, we have very
limited amount of resources and needs to rely on imports from countries like
Malaysia and Thailand.
However, due to inflation,
foreign countries may sell their imports at a higher price. This leads to a
high cost of production for Singapore, causing cost-push inflation. To minimize
costs, the NEA (National Environment Agency) plans to provide consumers with
cheaper food by opening up more hawker centres across Singapore. For example, “NTUC Foodfare, a social
cooperative, was appointed to run the new Bukit Panjang Hawker Centre on a
not-for-profit basis. In addition, NEA
plans to add 10 more hawker centres across Singapore to provide affordable food
options to Singaporeans.” In order to reduce consumption, the NEA also
encouraged supermarkets to promote cheaper alternatives of products that can be
suitable for hawkers, food courts and even households. “For non-prepared food,
the RPWG has worked with supermarkets, wholesalers, hawkers, and food courts to
promote the availability of cheaper alternatives.” By implementing hawker centres and promoting
of alternative products, hawkers and households do not have to spend such high
costs on imports anymore, reducing costs of production and ultimately, bringing
down inflation rate.
The government also mitigates
the rising inflation rate by reducing domestic cost pressures, lowering intake
of domestic workers. To manage a tight labour market, the government works with
unions and companies to raise productivity. Government can improve
employability of local workers through education and training which encourages
workers to upgrade their skill sets, making workforce more employable. With
enhanced productivity, firms will be able to pay their workers higher salaries
and cope with higher costs of production, without the need to pass on the
increased costs to consumers. Hence, consumers do not need to spend high costs
on goods and services, causing price levels of goods to drop and inflation rate
to be brought down.