Is Smoother Always Better? Understanding Singapore's Volatility-Growth Relationship

As a small open economy, economic growth in Singapore has been volatile over the past four decades. Business cycle fluctuations appear to have become more pronounced, with Singapore experiencing three recessions (1998, 2001 and 2009) in the past 15 years, in contrast to only one recession (1985) between 1965 and 1995. This perceived increase in growth volatility has led to discussions on two fronts.

The first concerns the sources of volatility. Several analysts have suggested that the high observed volatility in Singapore is indicative of a structural imbalance due to an over-reliance on exports (with a correspondingly small source of domestic demand).This argument implies that efforts to reduce Singapore’s growth volatility should focus on boosting Singapore’s domestic demand, in particular private consumption expenditure (PCE) which is deemed to be more stable. Our analysis indicates that no clear relationship between volatility and the share of PCE exists, especially for a small open economy like Singapore. Economic volatility in Singapore is better explained by our economic openness and outward orientation.

The second concern is the relationship between volatility and growth. A positive relationship would imply a trade-off where any attempt by policy makers to lower volatility would imply lower growth. On the other hand, if volatility is detrimental to growth (a negative relationship), policy makers should aim to reduce volatility to foster growth. This would imply more policy attention to either macroeconomic stabilization, or the active use of industrial policy to reduce growth volatility.

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