Economy watch: Uneven recovery raises spectre of widening income gap

Economists, citing 3Q GDP numbers, expect Singapore’s Covid-19 ravaged economy to recover soon. But while that idea is a positive one, it also brings about its own set of challenges. Recently, Monetary Authority of Singapore (MAS) managing director Ravi Menon warned that as much as a fifth of the city-state’s economy faces “deep scarring” as a result of the pandemic. “Ten to 20% of the economy is probably going to face some deep scarring from which they may not recover,” Menon said at a virtual event hosted by the Institute of International Finance on Oct 12. Pointing to the aviation industry, Menon added: “A big chunk of the rest may not go back to underlying potential pre-crisis for quite some time”.

In spite of the close to $100 billion in stimulus doled out by the government, the MAS chief says Singapore has yet to see the full extent of the crisis. For example, more bad loans and bankruptcies are also expected through the start of 2021.

But on a micro and individual level, economists also bring up another concern: The spectre of a widening income gap. “The pandemic recession has a disproportionately large negative impact on the lower wage workers. Most of the services sectors’ hardest hit — retail, F&B, recreational, tourism and hospitality — employ workers earning wages below the overall average,” says Maybank Kim Eng’s senior economist Chua Hak Bin.

Up till the end of 2019, household income inequality was at its lowest in almost two decades as median household income grew to $9,425, according to data released in February by the Singapore Department of Statistics (SingStat). The inequality, measured using the Gini coefficient based on household income from work per household member, was 0.452 for 2019, versus 0.458 in 2018. Back in 2001, it was 0.454 and the peak was in 2007 with 0.482.

DBS Bank’s senior economist Irvin Seah observes that people in the high-income strata may have felt the recovery with the rebound in the equity market. This may not be true for those in the lower-wage category or those that have been displaced. What this also means is that there could still be job losses and business closures in the ongoing 4QFY2020 ending December. OCBC’s head of treasury research and strategy Selena Ling expects these developments to be concentrated in the industries that have yet to resume operations and those facing low consumer demand.

However, the economists are hopeful the possible Phase Three reopening — which is expected to happen soon — will bolster Singapore’s economic growth. Specifically, both the services and construction sectors may see improvements from the re-opening of more activities — such as the nightlife sector — and allowing tourists from countries Singapore has a reciprocal green lane agreement with, says Ling. As such, she is looking at a milder 1.3% y-o-y contraction in 4Q2020, while full-year GDP will shrink by 5.5%.

UOB economist Barnabas Gan is more pessimistic than Ling. He is looking at a deeper 5.2% y-o-y contraction in 4Q2020, with full-year GDP coming in at a contraction of 6.5%. “The pace of the recovery has been hampered by the continued softness in the construction sector amid a non-existent tourism demand which further dragged the services sector,” says Gan of his cautious outlook for 4Q2020.

Still, Gan says “the possible move to allow more people to attend social events would likely benefit Singapore’s food and beverage, wholesale and retail trade and hospitality-related sectors,” which collectively account for over 60% of Singapore’s GDP.

Other economists, such as DBS’s Seah and Maybank’s Chua, expect Phase Three to only bring incremental economic benefits. Seah, for example, expects 4Q to contract 5% and the full year to be down 6.5%. Chua, on the other hand, has pencilled a 4Q decline of 3.4% and a full year contraction of 5%.

As businesses and households are hopeful that Phase Three will come quickly, there remains uncertainty as to when this will be rolled out. After all, there would be nothing worse for a “scarred” economy than another lockdown due to a spike in Covid-19 cases — as is seen in some countries.