Financial Cycle and Macroeconomics

Question: Discuss about the Financial Cycle and Macroeconomics. Answer: Introduction Singapore is a potent Asian superpower despite its small size. Its economy is open and is highly conducive for trade and attracting foreign investors. The macroeconomic indicators of the country are also stable which augers well for economic growth. The per-capita GDP is the third highest in the world at $85,127 (taking PPP into consideration) in 2015. In 2015, the real GDP of the nation was $ 470.55 billion. On June 30, 2015, the total labour force in the nation is estimated to be 3.63 million. The unemployment levels are also stable at around 2% while the inflation continues to be near zero. Nearly (3/4)th of the GDP comes from the service sector while the manufacturing sector contributed for the rest. The exports are significantly greater than the imports resulting in a positive balance of payments. Due to its stable policy regime and investor friendly policies, Singapore attracted a FDI of $ 900 billion in 2015 while the investment from Singapore to outside nations stood at $ 518 billion (Tan, 2015). The present report aims to review the production output performance, labour market performance and price performance during the period 2005-2014. The various indicators used in this quest would be explained and also the fluctuations in the same during the period along with government intervention would be interpreted and explained. Production Output Performance Trend Analysis The following graph summarizes Singapores real GDP during 2005-2014 (TradingEconomics, 2016). From the graph again, it can be observed that the country has attained the highest GDP level in the year 2014 amounting to USD 306.34 billion. Also, the country has shown a constant uptrend in terms of GDP which was adversely impacted in 2009 when the GDP remained flat. Further, the economy has witnessed a comeback from 2010 when the GDP growth returned and has been continuing ever since albeit at a lower rate. The following graph summarizes Singapores real GDP growth rate during 2005-2014 (TradingEconomics, 2016). From the graph, it can be observed that both the highest and lowest growth rate in GDP can be attributed to the global financial crisis. This is primarily because, the lowest quarterly growth rate i.e. 13.5% coincided with the peak of the crisis and the highest quarterly growth rate i.e. 37.2% was observed at the time of recovery in the year 2010. These fluctuations in the growth may be attributed to the fact that Singapore is an open economy whose fortunes are driven by trade and financial services. Thus, global swings tend to have a profound impact on performance of economy. The following graph summarizes Singapores per capita GDP during 2005-2014 (TradingEconomics, 2016). It is evident that there has been a continuous uptrend in the per capita GDP. However, at the onset of the crisis i.e. 2008 and 2009, there has been a decline in the per capita GDP. The highest level of USD 51,440.82 has been attained in 2014 while the lowest level of USD 40,020.26 has been witnessed in 2005. This clearly depicts that the growth in GDP for most of the period has surpassed the growth rate in population which augers well for the improvement of living standards of people. Production Output Performance Definition of Indicators The dollar value of the various goods and services that are produced within the country during a given time period is referred to as GDP. Real GDP unlike nominal GDP aims to determine GDP at the base price and not at the current market price. As a result, the real GDP captures a true representation of economic growth that is unperturbed by inflation. The percentage change in the real GDP on a periodic basis is referred to as real GDP growth rate. This is highly useful in acting as a reliable measure of national economic growth. Further, the GDP per capital is derived by taking GDP and dividing the same by the national population at a given point of time and is reflective of the living standards (Mankiw, 2012). Production Output Performance Explanation From the above, it is clear that Singapore has witnessed a stable GDP growth barring the turmoil causes due to the onset of the global financial crisis. Besides, the rising levels of real GDP growth are a healthy sigh for the economy particularly in the post financial crisis era. Besides, the GDP growth rate exceeds the population growth rate which is leading to a rise in the per capita GDP and hence increasing living standards of residents (Mankiw, 2012). This trend in the long term paves way for a stable economy and prosperous nation Production Output Performance Measures taken by government The stellar performance during the last decade and the recovery from the global financial crisis can be attributed to the host of steps undertaken by the Singapore government. The ease of doing business in Singapore is one of the highest not only in Asia but also the world and hence the nation has continuously attracted significant FDI despite its small size. Using fiscal policy as an enabler, the government has provided encouragement and requisite support to the use of advanced technology. Also, the productivity of people is on the increase through government skill building programs and relentless focus on access to quality and affordable education and health services. Low corruption coupled with planned city and land development has enabled the launch of Singapore as a global financial hub and thereby contributes to its sustained exemplary performance (Waring Lewer, 2013). Labor Market Analysis Trend Analysis The following graph summarizes Singapores unemployment rate during 2005-2014 (TradingEconomics, 2016). The graph above indicates that the highest unemployment rate was witnessed in the third quarter of 2009 along with third quarter of 2005 and was estimated at 3.4%. The lowest level in unemployment was witnessed just before financial crisis started in 2008. Hence, the third and fourth quarter in 2007 had lowest levels of unemployment. In the recent times, the unemployment levels have stabilized around 2% which augers well for the economy. Unemployment Definition Unemployment refers to circumstance when individual belonging to labour force is without work. Based on the underlying reasons that dictate the unemployment, there are three types i.e. cyclical, structural and frictional. Cyclical unemployment occurs due to fluctuations of the business cycle which in turn impacts the demand for labour (Weale Christodoulakis, 2015). Structural unemployment occurs due to alterations in the underlying technology and structure of industry which fundamentally alters the skillsets required and hence the labour with these skillsets is not available, there is shortage of labour and simultaneously there is unemployment since the desired skill are lacking amongst the labour force (Goodwin et al., 2013). The time required for an employee to shift from one job to another leads to frictional unemployment (Mankiw, 2012). Types of Unemployment - Singapore All the above mentioned unemployment types occur in Singapore as explained below. Cyclical unemployment continues to exist as labour in Singapore primarily comes from outside the country and especially neighbouring Asian countries. Thus, fluctuations in the business cycle tend to alter the aggregate demand which has a profound impact on the labour demand and hence causes cyclical unemployment in times of recession (Tan, 2015). Structural unemployment exists as the nation continues to place emphasis on high technology and capital intensive practices in various sectors. As a result, the labour force needs to be highly agile and adapt to these new technologies used in various processes. Since skill up-gradation is a gradual process, hence there is some structural employment that exists (Pigou, 2013). As there are members of the work force who are looking for better jobs, thus they leave their jobs and thus are temporarily unemployed which gives rise to frictional unemployment (McTaggart, 2012). Unemployment Measures taken by the government In a bid to stabilize unemployment at an optimum level, a number of steps have been taken by the government. He government uses fiscal policy in a prudent manner which enhances the overall productivity and provides incentive to various businesses to set up shop in Singapore which ensures that cyclical employment is low (Borio, 2014). Further, in the form of innovative programs like Workfare Income Supplement (WIS), the government supports the unemployed so that they can successfully invest in skill building.(Wagner, 2014). Also, there are dedicated programs for enhancing skills such as SPUR (Skill Program for Upgrading and Resilience) where individual can both learn new skills and simultaneously get paid. These measures are highly helpful in minimizing the incidence of structural unemployment (Cho Newhouse, 2013). Price Level Analysis Trend Analysis The following graph summarizes Singapores inflation rate movements during 2005-2014 (TradingEconomics, 2016). It can be observed that then during the given period, a high inflation of 7% was clocked before the onset of the global financial crisis in 2008. In the aftermath of this crisis, there was deflation which reached a maximum level of -1% in 2010. The inflation rate has not been stable and is following patterns of rise and fall. The first inflation peak is visible just before the crisis while trough is visible at the height of the crisis in 2010. Again, owing to recovery in growth, inflation peaked in 2012 after which it has dropped to almost zero in 2014. Inflation Definition Inflation is referred to the general price rise and is detrimental if high as it erodes moneys purchasing power (Simpson, 2014). Inflation is the result of the interactions between the demand and supply forces. The two major reasons are inflation are the rise in demand and the shortage in supply or rise in the input costs. The inflation caused due to the demand exceeding the supply is referred to as demand pull inflation (Ghosh, 2013). However, the inflation which is caused due to rise in input costs which are then passed on to the consumers is referred to as cost inflation (Gandolfo, 2013). Types of Inflation and Causes - SingaporeBoth the demand and cost inflation exist in Singapore. The demand pull inflation is caused due to increase in population and their disposable income which leads to a higher demand for certain products and services. In the short run, since the supply cannot adjust to these, hence the price rises. Also, there are supply shocks especially in imported items which causes a decrease in the supply and simultaneously leads to cost inflation as these becomes expensive in the international market and the consumers in Singapore have to bear the brunt (Ghosh Yu, 2013). Inflation Measures taken by the government In order to reduce the dependence of nation on imports, the monetary authority of Singapore regulates the currency exchange rate. Besides, due to high amount of foreign funds inflow and outflow, interventions by the monetary authority becomes imperative so that these excess funds brought into the country do not fuel inflation (Bhaskaran, 2014). Besides, the government also uses various fiscal measures which include providing subsidies and tax rebates to those imported items which are integral to the life of the people particularly basic food products. This helps keeping inflation in check. Further, self reliance thorough long term negotiated contracts is also being worked out by the government to combat inflation (Das, 2014). Conclusion It can be derived on the back of the arguments that the macroeconomic indicators of Singapore during 2005-2014 have remained stable despite being briefly disrupted by the global financial crisis. This is commendable for an open economy which operates in a dynamic global environment where global shocks are so common. Despite that Singapore has been able to maintain a robust GDP growth while keeping unemployment and inflation in check. Also, a stable regime has been provided to the investors due to the stability in the above parameters. A huge credit for this environment goes to the government which has taken timely measures to ensure that the macroeconomic health of Singapore is not compromised. Reference Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?, Journal of Banking Finance, 45, 182-198. Bhaskaran, M., (2014). Challenges Facing the Singapore Economy, Southeast Asian Affairs,2014(1), pp.290-302. Cho, Y., Newhouse, D. (2013). How did the great recession affect different types of workers? Evidence from 17 middle-income countries,World Development,41, 31-50. Gandolfo, G., (2013). 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