singapore flag

The booming island nation of Singapore has dipped into a recession. The city-state, home to only 5.3 million people  is seen as a sort of “canary” for global economic growth. Singapore is heavily reliant on exports and when the global economy starts to head south, the country can be quickly thrown into recession. As an important trade and financial hub events in Singapore could point to larger underlying issues in the global economy.

Singapore has been suffering roller-coaster growth in the wake of the 2009 Financial Crisis. In 2010, the nation posted an astounding growth rate of 15 percent. In the first quarter of 2010, the country posted a annualized growth rate of a nearly unbelievable 36.4 percent. Now, through 2012 the government is hoping that the nation etched out an overall annual growth rate of 1.5%.

The last two quarters have seen a dramatic drop in GDP and the country is technically in recession. In the third quarter the Singaporean economy shrank by an estimated 5.9% (annualized), largely due to a drop in exports. Now through the forth quarter the economy has shrunk at a rate of 4%.

These large swings in GDP growth are caused by a high dependency on exports and a small external market unable to absorb economic downturns. Further, while the government has launched public service projects, such as building more public housing, they also exercise fiscal conservatism and have been careful not to create any stimulus bubbles.

The government is optimistic it can get growth back on track though projects growth rates of only 1 to 2 percent through 2013. Even this modest recovery will be highly dependent on stability in major export markets, such as the United States and China. Should either country slip into recession Singapore would likely be dragged into negative growth.

Interestingly unemployment rate actually reported a slight decline from 2% to 1.9%. With tightening immigration restrictions and a tight labor market, most companies are eager to hold onto acquired talent.  This creates a general environment in which most companies are willing to see a drop in profits, but will not institute lay-offs out of fear that they will not be able to reacquire an equally talented workforce.

The overall growth, however, has helped fuel high-levels of inflation with housing and other costs spiraling out of control. While the government has responded by launching new public housing projects and encouraging private sector investments, work remains to be done to deflate the market.

The turbulent economy in combination with high costs of living have amped up pressure on the People’s Action party, which has ruled the country unchallenged since 1965. While the party still dominates the Parliament, controlling 81 of 87 elected seats, its approval rating of 60 percent marks one of the lowest ratings in the party’s history.

Whether or not Singapore’s economic decline is merely a readjustment after posting strong growth in 2011 or signals a growing global recession, remains to be seen. Positive manufacturing growth in China and continued strong economic performance among many ASEAN nations, including Indonesia and the Philippines are offering hope that the Asian region itself can avoid widespread recession. Still with the U.S. economy poised to face setbacks in the wake of the U.S. Federal government’s continued  inability to tackle its massive revenue and expenditure problems, the risk of a global recession continues to grow.