NYJC H2 ECONS Macro CS Suggested Answers

Question 2 Trade Slump and Deflation Extract 5: UK slips into deflation as prices fall 0.1% The UK has officially slipped into deflation for th e first time in more than half a century, but economists and policy makers are not concerned, say ing that a brief period of gently falling prices is more likely to help growth than harm it. The UK has been teetering on the brink of deflation for several months because of the slide in global oil prices, falling household incomes and th e strength of sterling, which has reduced UK’s export competitiveness. Suneil Mahindru, chief investment officer internati onal equity at Goldman Sachs Asset Management, reacted by saying: “We are not concerne d about the UK”. Falling prices are “freeing disposable income and many industries, such as retail, are benefiting”, he added. UK households have suffered from falling real wages over the past few years. Now that prices of consumer essentials like food and energy are stagnant or falling, many households are finally getting a boost in living standards. Chancellor George Osborne said the data were good news for family budgets and should not be mistaken for “damaging deflation” — a vicious cy cle of falling prices and wages which shrinks an economy. He added that once deflation sets in consumers would expect prices to fall and they would delay spending for as long as possible in order to save money. This would perpetuate the problem and is known as a deflation trap. The deflation trap would lead to falling economic growth. Source: Adopted from The Financial Times, 19 May 2015 Extract 6: Deflation risk and trade slump cast chill over global economy The world economy is at risk of slipping into a def lation trap and faces a historic slump in global trade that should serve as a wake-up call fo r governments around the world. The International Monetary Fund warned on Tuesday that a “broad-based phenomenon” of low inflation, fed by a collapse in commodity prices and faltering demand, risked deteriorating into a full-blown deflation trap, particularly in advanced economies. The fund’s warning, came as the World Trade Organis ation forecast global trade volumes would rise only 1.7 per cent this year. This would be the slowest increase since the 2008 financial crisis, and a big reduction from the 2.8 per cent growth it forecast in April. "The dramatic slowing of trade growth is serious and should serve as a wake-up call,” said Roberto Azevêdo, the WTO’s director-general. The trend was particularly worrying in the context of an increase in protectionism and anti- globalisation rhetoric seen in the US and around the world, he said, adding: “This is a moment to heed the lessons of history and recommit to open ness in trade, which can help to spur economic growth.” The twin warnings highlight mounting concerns over the world economy’s slow recovery from the 2008 crisis and the tepid response by policymak ers. They also point to two key areas of concern. International institutions are increasingl y worried about the potential impact on a fragile global economy of the rise of populist poli ticians, such as US presidential candidate Donald Trump, and the protectionist policies they put forward.

They are equally frustrated by what they see as the failure of many governments to take tough decisions and their continuing overreliance on central banks and monetary policy to respond to slow growth. The IMF has for years urged governments to adopt more growth-friendly fiscal policies and to push structural reforms to stimulat e consumption and investment. Alongside the warning of a deflation trap, the IMF called for governments to target stagnant wages and adopt policies such as raising the minimum wage to boost incomes. Such a response, IMF economists wrote, was particularly necessary in adv anced economies, where “the scope of monetary policy to further stimulate demand is perceived to be increasingly constrained” and “policy rates are not far from their effective lower bounds”. Source: Adopted from The Financial Times, 28 September 2015 Extract 7: MAS 'must remain alert' to signs of slow growth Singapore's central bank should "remain vigilant" t o signs of slow growth in the country and make policy adjustments if needed, the International Monetary Fund (IMF) said. In a statement released yesterday, after a visit here, fund repres entatives noted that Singapore's growth prospects remain subdued, given a lacklustre global outlook. The IMF also said the Monetary Authority of Singapore's (MAS) latest move to stop the local currency from rising further against a basket of ke y currencies was "appropriate", given slowing growth, a weakening labour market as well as low oil prices worldwide. The fund noted that Singapore's economic growth has slowed markedl y in recent years owing to both domestic and external factors. At home, growth is constrained by an ageing labour force, tighter limits on foreign workers and the transition costs of the shift to an innovation-based growth model. On the external front, the outlook for global growth and trade remains subdued , the IMF said. The fund also said Singapore's growth is likely to slow further this y ear, as the full impact of the slowdown in global trade and capital outflows is felt and compa nies continue to hold back on hiring and investment. The most important short-term external risk is a sharper-than- expected global slowdown, which could result from weak growth in China, other emerging economies as well as key advanced economies. Still, the Singapore Government has enough in its coffers to ramp up spending and provide a short-term lift if the economic outlook worsens fur ther, said the IMF. "The authorities are prepared to implement fiscal stimulus through targeted measures, for example providing more income transfers to poor families and seniors and accelerating infrastructure spending," added the fund in its statement. In the longer run, raising productivity will be ess ential to Singapore's growth, given slower labour force expansion, the IMF said. Source: The Straits Times on 11 May 2016

Figure 3: Inflation Rate in Singapore Source: SingStats

H2 CSQ 2 Suggested Answers (a) Describe the trend in the consumer prices in Singapore between July 2016 and April 2017. [2] • Consumer prices show a falling trend between July 2016 and Oct/Nov 2016 (1m) • before rising from Oct/Nov 2016 to April 2017 (1m) . (b) Using extract 5, comment on whether economies should fear deflation. [4] i. Thesis • Yes economies should fear deflation if the economy is experiencing deflation trap or ‘damaging deflation’ as mentioned in Extract 5 para 4. Deflation trap is known as ‘a vicious cycle of fall ing prices and wages which shrinks an economy’ as ‘consumers would expect prices to fall and they would delay spending for as long as possible’, leading to a continuous fall in C and fall in AD (Draw) and fall in RNY, leading to ‘falling economic growth’ . ii. Anti-Thesis • No economies should not fear deflation as ‘consume r essentials like food and energy are stagnant or falling, many households are finally getting a boost in living standards’ as stated in Extract par a 3. Thus deflation can benefit households and make groceries more affordab le for everyone, especially benefitting the low income groups or une mployed who spend a large proportion of income on groceries / food wh ich is a basic necessity, hence promoting income equity. iii. Judgement Whether economies should fear deflation depends on whether the consumers are expecting prices to fall. If consumers expect that deflation is only temporary and economic conditions and price s will eventually improve in the months ahead, then deflation is not a concern. Note: • Two-sided answer on whether economies should fear deflation (3m