Lost output amidst pandemic could hit $50b: BofA

An expected recovery in 2021 won’t stop the bleeding.

In light of the escalating global situation and tightening domestic measures, the Bank of America (BofA) had already severely cut their 2020 forecasts throughout ASEAN, including for Singapore.

They forecast the economy to contract by -5.7% for the full year, the worst on record. Even after assuming a V-shaped recovery starting in the second half of the year and a 6.3% growth rebound in 2021, the total amount of 'lost output' due to the COVID-19 shock is estimated at around $50b over 2020-2021.

“This would represent a permanent loss, with GDP levels still seen below the pre-COVID trajectory into 2021. At this stage, the risks remain to the downside and the cost could increase substantially if the pandemic continues into the second half of the year,” BofA said in its report.

However, they also clarified that the decision to close "most" workplaces would be unlikely to incrementally add a significant economic cost for two reasons. First, activity had already been impacted severely by the double-hit from the domestic and external demand channels. These impacts had already been incorporated into BofA’s forecast for a -5.7% contraction in growth.

Second reason is that the government will allow essential services and other "economic sectors that are strategic, or form part of a global supply chain" to keep operating, albeit with safe distancing measures in place. As such businesses serving daily needs (food establishments, markets, clinics, hospitals, transport, key banking services, etc.), as well key export sectors such as semiconductor, pharmaceutical manufacturing and several others will be allowed to stay open.

On the other hand, sectors such as construction, retail trade, real estate & recreational services are expected to be severely affected. “We estimate these severely impacted sectors to account for around 10% of GDP, but employ nearly 800k workers—or 20% of total employment. The risks of a prolonged closure will thus be felt primarily in the labor market, rather than overall economic activity at the first instance,” BofA stated.

Solidarity budget takes support to $60b
Finance Minister Heng Swee Keat’s latest solidarity budget amounting to $5.1b. Its key highlights were (a) an enhanced 75% wage subsidy (for the first $4.6k of monthly salary) for all local workers in April; (b) waiver of foreign worker levy for April and a $750 levy rebate for each work-permit and S-pass holders; and (c) a one-off $600 payment in cash to all Singaporeans in mid-April, which also includes the $300 which was due to be paid in June.

This already adds to the already large fiscal measures unveiled over the past few months. Taken together, the total size of fiscal support stands at around $60b, or around 12% of GDP. Of these, roughly two-thirds ($37b or 7.8% of GDP) will be in the form of direct fiscal injection, with the remaining primarily made up of the $20bn in loan capital.

“One common question from investors had been why the record fiscal support had not led to positive growth upgrades,” BofA noted. “First, this is because the epidemic cycle is still winning the race against the policymakers, who are responding only with a lag. Second, even the amount of direct fiscal injection does not translate one-for-one to economic 'value added' due to high degree of import leakage and low marginal propensities to consume.”

For example, MAS estimates over 2013-2019 show that every 1% of GDP of fiscal impulse is only expected to increase growth by a small 20bp. This is said to be clear in the case of the jobs support scheme, which merely shifts part of the cost of paying wages from the firms to the government.

Labour market to be severely hit
Alongside the deep and broad-bases contraction in economic activity, the labour market is also expected to come under stress. With the collapse in demand across most sectors, firms will likely undertake a range of measures to manage excess manpower, including placing workers on short work-week, temporarily laying them off, or letting them go altogether. 

Both the number of retrenchments and workers on short work-week or temporary lay-off spiked during previous recessions, and lead the overall and resident unemployment rates significantly higher.

“Despite the record policy support, we expect significant pain ahead in the labor market,” the report said.

Overall unemployment rate could spike to around 4% (from 2.3% at end-2019), whilst the increase in resident unemployment rate is expected to be more muted given the policy support that is specifically targeted at these jobs.

Meanwhile, retrenchments will likely test the global financial crisis (GFC) highs and could also overshoot if the stress is protracted. BofA thinks there is room for average resident wages to contract by around 3-4% this year, higher than the -2.7% fall seen during the GFC.

Given the all-out effort to preserve jobs and the near 90% (88.4%) of private sector employees who are estimated to work in firms with some form of flexible wage system, firms may rely on larger wage adjustments than usual. It was also notable that over 60,000 applications had been made for the government's Temporary Relief Fund, targeted at those who have suffered at least a 30% drop in income or have lost their jobs, within a week since applications opened last 1 April.

This report is from the Bank of America’s “Singapore Economic Watch: Counting the costs of COVID-19”.