Growth prospects for the world’s most trade-intensive economy already looked dim as the tiny city-state grappled with a global economic downturn and later the deadly Severe Acute Respiratory Syndrome, or Sars, virus struck. The combination has sent Singapore into tailspin. Flash government estimates show the GDP shrank an annualized 11.8 per cent in the second quarter over the first — the worst such fall on record. The data translates into a second quarter year-on year contraction of 4.3 per cent. It’s worse than even the most pessimistic analysts’ expectations.

Sars hammered Singapore’s economy and in particular its tourism sector. Tourist arrivals contracted 63 per cent year on year to 678,000,according preliminary figures; the last time Singapore saw fewer visitors in any three month period was in the first quarter of 1984. The contraction in the second quarter wipes off abut 4 per cent of the GDP in one stroke. Even assuming 50 per cent improvement tourism in the third quarter, the sector will still be down by about a third year on year. Uncertainties in the United States economy and a relatively weak global electronics market further dampened demand for exports. Second quarter manufacturing output fell 7.5 per cent year on year according to the Ministry of Trade and Industry while construction output contracted 10.9 per cent and the services-producing sector dropped by 3 per cent.

Further cost-cutting and corporate restructuring also threaten to send Singapore’s 4.5 per cent unemployment rate over the 5 per cent mark. Port operator PSA Corp; Singapore Airlines and media giant Singapore Press Holdings have all recently announced retrenchment programmes. Acknowledging that Sars and the war in Iraq had hit the economy harder than expected, the government has effectively eased monetary policy. The Monetary Authority of Singapore “re-centred” the secret policy bands within which manages the Singapore dollar. Many economists forecast the economy will likely improve in the second half of the year. Sars has been brought under control and that Singapore should be able to post positive growth in the third and fourth quarter.

In a recent research report, economists at the DBS Bank argue that a technical recession — defined as two consecutive quarters of negative quarter — on quarter growth is unlikely in view of the improving external outlook and note that recent U.S.economic data show sings of a pick-up in recovery momentum. The administration has already cut its official forecast for full year GDP growth to between zero and 1 per cent from 0.5 per cent to 2.5 per cent. Second half growth is predicted to be between 1.3 per cent and 3.3 per cent, making it unlikely that Singapore would suffer a technical recession defined as two consecutive quarters of contraction. But officials warned unemployment would hit 5.5 per cent, the highest rate since the mid-1980s, as big companies — including Singapore Airlines, port operator PSA, Neptune Orient Lines and Singapore Press Holdings- cut jobs.

The International Monetary Fund (IMF) predicted Hong Kong’s economy to grow 3 per cent in 2003, up from 2 per cent in 2002 with the faster growth based on strengthening external demand, supported by robust growth in mainland China. The IMF also noted that deflation could begin to ease, although weak property prices, high unemployment, and other structural factors are likely to continue to dampen both domestic demand and the overall level of prices. In the medium term , the outlook for Hong Kong will depend on how it meets the challenges of integration with the Mainland and rising regional competition. Nothing that continued deterioration of the fiscal position in Hong Kong has made it the main source of potential macroeconomic vulnerabilities, the IMF calls for a credible fiscal consolidation to begin in fiscal year 2003-04 . This will require the implementation of sizeable structural deficit reduction measures in fiscal year 2003.04, and a commitment to more substantial consolidation, supported by concrete measures, in the next three years.

The IMF welcomes the government ‘s objective of achieving a balanced budget by fiscal year 2006-7. However, a well-specified deficit reduction plan will be essential to bolster market confidence in Hong Kong’s macroeconomic policies. The government, however, should implement sizeable structural deficit reduction measures in the fiscal year 2003-04. There should also be a commitment to more structural consolidation supported by concrete measures in next three years. The government has accorded top priority in addressing the deficit situation and will take concrete measures to restore budget balance in the year of 2006-07.