Backdrop on global financial and economic crisis
The world economy has witnessed one of the most tumultuous and challenging times. Global GDP is expected to contract in 2009, the first time in the post-War period.1 The tremors that shook the financial markets surpassed the most extreme stress scenarios. Bank losses have now exceeded US$1.5 trillion and further writedowns are expected. In the six months following the collapse of Lehman Brothers, from September 2008 to March 2009, stock markets worldwide fell by almost 40%, wiping off about US$16 trillion in capitalisation. Singapore’s Straits Times Index (STI) also fell by close to 35%. In the fixed income markets, the rally in government bonds was offset by the sell-off in the non-sovereign sectors such that global bond markets in aggregate also declined over this period. Many institutional and individual investors were affected negatively.
These shocks to the international financial system severely disrupted credit flows and led to dislocations in economic activity globally. The US – which was the epicenter of the crisis – as well as the EU and Japan, fell into a deep recession. The collapse in G3 demand, in turn, had a cascading effect on the emerging economies. As trade collapsed towards the end of 2008 and into the first few months of this year, Asia’s export-reliant economies were hard-hit.
Against this external backdrop, the Singapore economy contracted sharply, as our manufacturing, transport, logistics and wholesale trade industries were closely tied to global and regional trade flows. By the first quarter this year, the economy had posted an output loss of around 10% from its peak a year ago, the steepest decline in its history.