Singapore: Looking to the future

Singapore: Looking to the future

Singapore: Looking to the future

Asia Pacific Economic Outlook, August 2014

Singapore’s plan to become the world’s first “smart nation” is ambitious but by no means impossible. It is one of many measures that policymakers have taken to address structural economic issues.


In June, the Infocomm Development Authority of Singapore unveiled plans to transform Singapore into the world’s first “Smart Nation.”1 The country wants to integrate technology and analytics for better governance, public services, and quality of life for citizens. The plan is ambitious but by no means impossible. The country’s track record of creating a hub of trade, manufacturing, and finance out of the destruction of World War II bears testimony to that. Interestingly, the Smart Nation plan is not an isolated strategy. It is one of many measures that policymakers have taken to address structural economic issues such as an aging population, productivity in semiskilled manufacturing, and social welfare.

Growth slows in Q2 2014

GDP growth fell to 2.1 percent year over year in Q2 2014 from 4.7 percent in the previous quarter. On an annualized quarter-over-quarter basis, the economy contracted 0.8 percent. All the key components of the economy—manufacturing, construction, and services—weakened in Q2. The slowdown in manufacturing was, however, the sharpest: The sector expanded a mere 0.2 percent year over year in Q2, a stark contrast to the 9.9 percent rise in Q1. Worryingly for policymakers, services activity was not able to cover for the slack in manufacturing. The services sector grew just 2.8 percent, the slowest pace since Q3 2012. Meanwhile, a slowdown in the housing sector continued to weigh on construction, with growth declining to 5.0 percent in Q2 from 6.4 percent in Q1. Headwinds from housing are likely to persist in the near term, keeping private sector construction activity weak.

Caution for manufacturing

The slowdown in manufacturing in Q2 2014 is not surprising. Even in Q1, when growth had been high, there were concerns regarding near-term strength in the sector. First, the sharp uptick in Q1 was partly a result of surging biomedical output, which tends to be volatile. Second, restrictions on foreign labor have forced up wages and therefore cost of production. A relatively strong Singapore dollar has not helped either. These factors have led to lower competitiveness, especially in electronics. In fact, a sharp slowdown in electronics was the key reason behind low growth in manufacturing in Q2. Recent manufacturing PMI data also reflect this trend, with exporters facing weakening orders. The problem of low competitiveness in some manufacturing segments, especially the low-value-added ones, will continue in the short term as the government shifts focus to high-end sectors such as biotechnology and pharmaceuticals.

Near-term external demand challenges

Apart from competitiveness, manufacturers in Singapore have also had to reconcile lower-than-expected global demand growth this year. Although the US economy is expected to recover post a one-off contraction in Q1, a struggling Europe and a slowing China have not helped. Q2 trade data reflect this slowdown as well as supply-side problems. Non-oil domestic exports from Singapore fell 6.6 percent year over year in May; electronics exports fell for a second straight month. Given that the scenario will not change much in the near term, both manufacturing and exports will continue to face pressure over the rest of the year. External demand is, however, expected to improve in 2015 as global growth picks up. Re-exports will benefit from an expected improvement in the global trade cycle.

Investments will come under pressure

Weakening manufacturing in the near term does not augur well for business investment, even as a slowing housing market has dented residential investments. Moreover, the government’s efforts to induce firms to invest in labor-saving technology will likely not bear much fruit in the short term. Consequently, fixed capital investment is expected to grow a mere 2–3 percent this year. In the medium term, though, labor saving investments will rise, thanks to the government’s Productivity and Innovation Scheme. Investments will also benefit from an uptick in global growth and the government’s Smart Nation plan. Consequently, fixed investment is likely to shift to a healthier growth trajectory (of 4–5 percent) over 2015–17.

Housing is a worry

The housing sector continues to remain under pressure. Flash estimates by the Urban Redevelopment Authority indicate that residential property prices fell 1.1 percent quarter over quarter in Q2 2014, the third straight quarter of decline.2 Much of this is due to government measures to prevent a bubble. Higher mortgage rates and foreign worker restrictions have not helped. The latter has led to a weak rental market; rents fell for a second time in Q1 2014. With demand slowing, supply has been edging up, with the vacancy rate for completed private residential units rising to 6.6 percent in Q1 2014 from 6.2 percent in Q4 2013. This is expected to rise further in the coming quarters. Consequently, correction of house prices will likely continue into 2015.

Opposing pressures on consumers

Declining house prices have impacted household balance sheets. Growth in private housing assets slowed to 3.0 percent year over year in Q1 2014 from 4.6 percent in Q4 2013 and 7.3 percent in Q1 2013. This has pushed down growth in household wealth, which in turn is likely to weigh on private consumption. There are some signs of this already happening; retail sales volumes fell again in May (-6.6 percent), continuing from April’s 9.0 percent decline. However, consumers will find support from wage gains due to a tight labor market (unemployment at 2.1 percent in March). With inflation also set to remain steady, private consumer expenditure growth is expected at 2.0–2.5 percent this year, close to the 2013 figure.

Policy supporting currency to continue

Currently, inflation is not a concern for the Monetary Authority of Singapore (MAS) despite it rising to 2.7 percent in May from 2.5 percent in April. A number of supply-side factors such as easing transport and housing prices will keep inflation in check this year. MAS’s focus on a relatively strong Singapore dollar will also help. So far, it has done a commendable job in keeping the currency stable despite high volatility in other Asian currencies since 2013. MAS (and the government) will, however, be wary of the impact of a housing slowdown on banking. With house prices expected to weaken in the near term, MAS will be hoping that any such correction is gradual and not deep.

The plan to transform Singapore into a smart nation is the government’s latest and, arguably, boldest effort to herald a futuristic economy.

Looking beyond short-term problems

While policymakers worry about short-term fluctuations in housing and external demand, their long-term focus on transforming the economy is encouraging. Since 2013 the government has been enacting measures to increase productivity and therefore potential GDP. This is critical given slow population growth, rising median age, and strong public opinion against immigration. The plan to transform Singapore into a smart nation is the government’s latest and, arguably, boldest effort to herald a futuristic economy. It has already selected the Jurong Lake District for a pilot project to test infrastructure and technology that enable public authorities to collect and analyze data. This in turn will help authorities improve public services including transport and utilities, ultimately adding to the attractiveness of a nation that leads the world in ease of doing business. Without a doubt, the future looks bright for Singapore.


View all endnotes
  1. Infocomm Development Authority of Singapore, “Singapore unveils building blocks of Smart Nation vision,” June 2014.
  2. Singapore Urban Redevelopment Authority, “URA releases flash estimate of 2nd quarter 2014 private residential property price index,” July 2014.


Akrur Barua

Akrur Barua is an economist and a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, August 2014: Singapore
Cover Image by Jessica McCourt (Cover), Stephanie Dalton Cowan (Singapore)