Explaining the Greater Impact of Trade on GDP: Comparison with the 2001 Recession

Fluctuations in Singapore’s real GDP are closely correlated to changes in trade figures, because of Singapore’s nature as an externally-oriented and open economy. In the first quarter of 2009, nominal trade fell by a sharp 24 per cent. Although this decline was similar to the decline experienced at the bottom of the 2001 recession (-21 per cent), the decline in real GDP in the first quarter of 2009 (-10 per cent) was more severe than its corresponding decline in 2001 (-6.4 per cent) (Exhibit 1).

To some extent, the sharper decline in GDP in recent months reflects the broad-based nature of the current recession. In 2001, sectors not directly related to trade, such as financial services and information & communications, still managed to contribute positively to GDP growth, thereby partly offsetting the impact of the decline in exports. In 2009, however, there has been no such offsetting effect. Some non-trade related sectors, in particular financial services, have experienced sharp declines as well.

But it has also become clear that trade-related activities have had a bigger impact on the economy since 2001. This box seeks to explain the greater impact of trade on real GDP in the current recession, by examining its impact on the manufacturing and services sectors in turn.

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