Macroeconomics The Growth of An Economy

Question: Discuss about the Macroeconomics The Growth of An Economy. Answer: Economic Concepts The growth of an economy depends on a number of social, political and macroeconomic parameters (Blanchard and Johnson, 2012). The growth rate of a certain economy determines the rate at which the economy grows from one period to another. Depending on the period of estimation, the growth rate of an economy may overestimate or underestimate the true potential of economic growth (Mankiw, 2012). This is because in the short run the economy may be subject to temporary expansion or contraction due to unanticipated shocks or sudden changes in some macroeconomic parameter. An economy may grow at a higher rate than forecasted as a result of an improvement in some sector which constitutes a considerable proportion of the gross domestic product (GDP). This increased growth rate may be temporary or may sustain in the long run depending on where the expansion originated and whether it will persist (Krugman and Wells, 2012). Economic Analysis In the financial year of 2016, the economy of Singapore had grown at the rate of 1.2 percent in the third quarter. The government of Singapore had anticipated the growth rate to be somewhere in between 1.0 percent and 1.5 percent for the year 2016. However, on the 3rd of January 2017, the Ministry of Trade and Industry released the advanced estimates for the final quarter of 2016 which put forth a completely different and unexpected scenario (Shaffer, 2016). The growth rate recorded in the final three months was as high as 1.8 percent which was 0.6 percent above the growth rate of the preceding quarter (1.2 percent) and 0.3 percent higher than the maximum forecasted growth rate (1.5 percent). The recorded growth rates are estimated on a year-on-year basis. In the previous quarter there had been a contraction of about 1.9 percent. Moreover, economic output had considerably declined for two consecutive quarters marking a technical recession over the period. In spite of these, the gross domestic product (GDP) had recorded a growth rate of 9.1 percent based on a seasonally-adjusted quarter-on-quarter estimation. In the preceding November, industrial production had considerably risen and this gave way to the expectation that the economy would ward off a forthcoming technical recession (Min, 2016). The gross domestic product of the economy of Singapore had been anticipated to grow at the rate of 3.7 percent in the fourth quarter on an annualized basis compared to the previous quarter. The year-on-year growth rate was forecasted at 0.6 percent. These forecasts had been put forward by various economists interviewed by Reuters (Williams, 2017). Though the quarterly data for the economic growth in the year 2016 looked promising, the annual growth rate of the economy was the lowest marked since the financial year of 2009 which had recorded a low growth rate shrunk by 0.6 percent due to the global financial crisis. The financial year of 2015 had registered a growth rate of 2 percent. The quarterly GDP growth rate of the Singapore economy for the financial year 2016 evaluated at 2010 prices is shown in the following table: QUARTER GDP GROWTH RATE 1 2.1 2 2.1 3 1.2 4 1.8 The quarterly growth rate is illustrated with the following diagram: FIGURE 1 As shown in Figure 1, the growth rate of the economy had been constant at 2.1 percent for the first two quarters of 2016. In the third quarter, the growth rate dipped to 1.2 percent thereby recovering by 0.6 percent in the fourth quarter and recording a growth rate of 1.8 percent. The following table shows the GDP growth rates recorded by the economy of Singapore over the past 10 years: YEAR GDP GROWTH RATE 2007 9.11 2008 1.79 2009 -0.60 2010 15.24 2011 6.21 2012 3.67 2013 4.68 2014 3.26 2015 2.01 2016 1.80 The above table for the yearly growth rates of GDP for Singapore is illustrated with the following diagram: FIGURE 2 In Figure 2, it is seen that the economic growth rate for Singapore was as high as 9.11 percent in the year 2007. After the Global financial crisis hit, the growth rate fell to 1.79 percent in the year 2008 worsening further in the following year to hit a negative growth rate of -0.6 percent. Thereafter the economy had recovered rapidly in the year 2010 following which the growth rate had again fallen in the later years. As is evident from the above figure, the growth rate had been considerably fluctuating over the past few years. However, the financial year of 2016 recorded the lowest growth rate (1.8 percent) ever since the financial crisis period of 2009. The rapid and unexpected growth registered in the fourth quarter of 2016 is attributed to the remarkable development of the manufacturing and services sector of the economy. The manufacturing sector accounts for 20 percent of the gross domestic product of the economy. It had grown by 1.7 percent in the third quarter of 2016. However, in the fourth quarter the growth rate recorded by the manufacturing sector was as high as 6.5 percent. (Williams, 2017)According to the Ministry of Trade and Industry, transport engineering and the general manufacturing segments had been continuously shrinking. In spite of that the manufacturing sector on the whole recorded such a high growth rate due to the rapid development of the electronics and biomedical segments. The growth rate was 14.6 percent in the fourth quarter on a seasonally-annualized basis. There was a steep increase as compared to the previous quarters 8.1 percent contraction. The overall growth recorded by the manufacturing sector was 2 .3 percet for the year 2016. The quarterly growth rate of the manufacturing sector in shown in the following table: QUARTER GROWTH RATE 1 -0.4 2 1.5 3 1.7 4 6.5 The above table is represented with the help of the following diagram: FIGURE 3 On the other hand, the services sector of the Singapore economy had been growing at the rate of 0.6 percent in the fourth quarter which was much higher that the growth rate of 0.3 percent in the previous quarter. The sudden increase in the growth rate was reportedly due to the business services divisions along with the transportation and storage business segments. The expansion in the service sector was as high as 9.4 percent as estimated on a quarter-on-quarter basis which marked an improvement from the contraction of the preceding quarter. The services sector is said to constitute two-third of the gross domestic product of the economy and hence works as a fundamental driving force of growth and employment in the economy. Hence any development in the services sector will always be accompanied by a certain improvement of the economy. The fourth quarter of 2016 is said to have marked the end of the technical recession in the services sector. The quarterly growth of the services sector is shown in the following table: QUARTER GROWTH RATE 1 1.6 2 1.3 3 0.3 4 0.6 The above table is represented with the help of the following diagram: FIGURE 4 As is evident from Figure 4, the growth rate of the services sector had dipped steeply in the third quarter of 2016. But thereafter it recovered in the final quarter (Dornbusch, Fisher and Startz, 2013). A combination of all this led to the recorded growth of the Singapore economy in the fourth quarter of 2016. As a result of the upward movement in the growth rate, the aggregate demand in the economy would increase to a considerable extent because of the considerable improvements in the manufacturing and services sector. All the components of the gross domestic product like consumption, investment and government spending will all increase by a certain extent, thereby expanding the aggregate demand. The aggregate supply will also increase as a result of the development in the different sectors. The relative changes in the aggregate demand and aggregate supply are shown with the help of the following diagram: FIGURE 5 As is evident from Figure 5, the aggregate demand and aggregate supply of the economy both will increase. The changes in the price and output will depend on the relative changes in the two curves. The output will evidently increase and the new equilibrium output will be higher. However, the change in the price level will depend on the relative positions of the aggregate demand and aggregate supply curves. If aggregate supply increases more than the aggregate demand as shown in the above figure, then the price level will fall. On the other hand if aggregate demand increases more, the price level will increase. However, if the aggregate demand and aggregate supply increase by the same amount, the price level will remain the same. Conclusion In spite of a promising final quarter, it is difficult to predict what the future holds for the Singapore economy. The growth may not be sustainable as a result of the many downside risks that the economy may be subject to in the future. The downside risks include upward moving local interest rates, the weakness of the property market and the persistent process of economic restructuring. These factors will impact growth to a considerable extent and most likely on the downside. Rising interest rates translating into higher borrowing costs will have a downside effect on household and business spending along will also adversely influence the housing market. The growth rate for the year 2017 as predicted by Mr. Tan is 0.7 percent while that predicted by the government is between 1 to 3 percent. References Blanchard, O. and Johnson, D. (2012). Macroeconomics. 6th ed. New York: Pearson Education. Dornsbusch, R. Fisher, S. and Startz, R. (2013). Macroeconomics. 12th ed. New York: McGraw Hill Education. Krugman, P. and Wells, R. (2012). Macroeconomics. 3rd ed. New York: Worth Publishers. Mankiw, N. (2012). Macroeconomics. 8th ed. New York: Worth Publishers. Williams, A (2017). Singapore economy grew 1.8% in 2016 , stronger than expected: Flash data. [online] Available at: https://www.straitstimes.com/business/economy/singapore-economy-grew-18-in-2016-stronger-than-expected-flash-data [Accessed 6th March 2017]. Min, C (2016). Economists slash Singapore GDP forecasts for 2016, 2017 after disappointing Q3 data. [online] Available at: https://www.straitstimes.com/business/economy/economists-slash-singapore-gdp-forecasts-for-2016-2017-after-disappointing-q3-data [Accessed 6th March 2017]. Shaffer, L (2016). Economists are less optimistic about Singapores economic outlook. [online] Available at: https://www.cnbc.com/2016/09/07/economists-are-less-optimistic-about-singapores-economic-outlook.html [Accessed 6th March 2017].