Economics - How a Shrinking Gdp Affects the Economy of Singapore

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In a recent article by Channel News Asia dated 13 July 2012, it was reported that Singapore 's GDP contracted by 1.1% on a Quarter-on-Quarter seasonally-adjusted annualized basis, compared to the 9.4% expansion in the preceding quarter. The weakened growth momentum in Q2 was mainly due to a sequential contraction in the manufacturing sector. The sector declined by 6.0% reversing the 20.9% expansion in the preceding quarter. Annex A

Singapore is an open economy with high trade to GDP ratio of 2.3 times (GDP 2011 was $326B, whereas total trade value in 2009 was $747.15B) and is exposed to many external factors, especially economic development in a main export market. Our main trading partners are: Malaysia China Euro zone USA Indonesia –
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When producers lower their prices they earn less revenue, to offset this lost of income producers would have to lower their cost of production by lowering their overhead costs like labour. This could lead to unemployment in the economy. Recognizing the extenuating factors, The Monetary Authority of Singapore (MAS) has lowered GDP growth forecast for Singapore and increase inflation for the rest of the year. A slower economic growth does not normally lead to higher inflation. The converse is normally true. Slowing down of demand tend to lead to lower demand for raw materials and thus a fall in material prices. Then why is our inflation level so high? Annex B

MTI released our June CPI, which is inflation The number was 5.3%, compared with 5% in May and 5.4% in April. Singapore (MAS) manages its currency against a trade-weighted basket of currencies of Singapore’s major trading partners and competitors. When inflation is high, the SGD is allowed to strengthen. As can be seen from the data, inflation remains stubbornly high due to high Housing and Transportation costs. This is caused by high COE prices due to a systematic reduction in number of COEs. And high property prices and housing costs due mainly to low interest rates (too much liquidity in the system), the fact that Singapore is economically stable and is considered a safe haven to live. This caused an increase in demand
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