Singapore: Challenges amid optimism

Singapore: Challenges amid optimism

Singapore: Challenges amid optimism

Asia Pacific Economic Outlook, March 2014

Singapore’s economy continues to expand steadily, aided by healthy domestic demand and a strong services sector. However, there are concerns about rising household debt and a possible housing bubble.

Singapore_photoSingapore’s economy continues to expand at a steady pace, aided by healthy domestic demand and a strong services sector. Encouragingly, external demand is also edging up as the United States and Europe start recovering. However, there are concerns about rising household debt, a possible housing bubble, and emerging-market weakness. At a more structural level, the government’s efforts to enhance productivity and develop high-tech sectors in manufacturing will take time to bear fruit and hence keep the sector under pressure. Policymakers also face a tough challenge in ensuring high growth in the long term amid an aging population and popular opposition to immigration.

Healthy growth in Q4 2013

The economy grew 4.4 percent year over year in Q4 2013, pushing annual GDP growth to 3.7 percent. This is way above the 1.3 percent expansion in 2012, and within the government’s 3.5–4.0 percent forecast. Encouragingly, growth is likely to be revised upward given better-than-expected data for industrial production and exports in December. Overall, economic activity in Q4 benefitted from healthy performance in all the key segments: manufacturing (3.5 percent), services (5.5 percent), and construction (4.7 percent). However, growth for all three was lower than the previous quarter. Both manufacturing and services are expected to remain strong in 2014 owing to higher global growth and Singapore’s solid status as a financial hub. While manufacturing is expected to expand 3.0–3.5 percent this year, up from 0.8 percent in 2013, services growth is likely slow down marginally to 4.5–5.0 percent. Construction will face pressures this year from slowing house prices and higher supply, but the impact will be partially offset by government investment in affordable housing and infrastructure. It will also be enough to keep overall GDP growth at 3.7–4.3 percent in 2014, with strong upside potential in 2015–16.

The uptick in manufacturing is arguably the best news for Singapore’s economy.

Manufacturing likely on its way up

The uptick in manufacturing is arguably the best news for Singapore’s economy. In December 2013 industrial production grew 6.2 percent year over year, continuing from November’s strong 6.6 percent rise. After a weak first half, the critical electronics segment picked up pace later in 2013: It grew 22.2 percent in December, thereby pushing overall 2013 growth to 3.5 percent. There was positive news in chemicals as well, and although the biomedical segment was in negative territory, it is expected to correct course this year. In fact, over 2014–15 external demand for manufacturing products is expected to consolidate as the economic recovery in the United States and Europe gathers pace. This is evident from recent export data as well. In December 2013 domestic exports (excluding re-exports) grew 5.8 percent, reversing course from a 6.0 percent decline in November. The story for non-oil domestic exports was even better, with a 6.0 percent rise in December relative to November’s 8.9 percent decline.

MAS will continue to support the currency

The Singapore dollar has remained relatively stable amid volatility in emerging-market currencies in response to the US Federal Reserve’s (Fed’s) decision to taper quantitative easing. Against the US dollar, the Singapore dollar shed only 3 percent in 2013, compared with double-digit declines in the Indonesian rupiah, the Indian rupee, and the Turkish lira. The currency’s stability in a volatile global scenario is due to the Monetary Authority of Singapore’s (MAS’s) policy of keeping the currency strong to counter inflation. MAS’s current policy is likely to continue in 2014 despite a dip in inflation to 1.5 percent in December 2013 from 2.6 percent in November. The drop in December was most likely a temporary reprieve, with consumer prices set to face wage-push pressures in 2014 owing to restrictions on foreign workers in a tight labor market (1.8 percent unemployment). A low base will also come into play in Q2 2014. Overall, average annual inflation is expected to rise to 3.0–3.5 percent this year from 2.4 percent in 2013.

Problems with a low-interest-rate regime

To keep the Singapore dollar stable relative to its US counterpart, MAS has mirrored the Fed’s low-interest-rate policy, and this has pushed up credit growth. Worryingly, a large chunk of credit has gone to housing, lured by a rise of more than 60 percent in property prices since the trough of 2009. Consequently, household debt has also gone up: In 2013 it was 75 percent of GDP, up from 55 percent in 2010. Rising household debt and fears of a housing bubble worry banking analysts and rating agencies; for now, though, they appear comfortable with the government’s efforts to ease house prices without any sharp deceleration. In Q4 2013 prices of private residential properties fell for the first time (0.9 percent quarter on quarter) since Q1 2012. For consumers, easing house prices amid high debt will translate to a negative “wealth effect.” The impact of this was evident in Q4 2013, when retail sales fell for the first time in nine months in October (0.4 percent year over year) and barely grew in November. Such a scenario will temper any private consumption gains in 2014 that come from a likely rise in nominal wages, which in turn will keep the segment’s growth below 4 percent this year.

Dealing with key cyclical and structural challenges

Singapore’s economy currently faces three key hurdles. The first, greater susceptibility to emerging economies, is cyclical and due to greater exposure to these markets. For example, the share of China (including Hong Kong), India, and Indonesia together in Singapore’s outward FDI was 38 percent in 2012, up from 33 percent in 2008. With these economies slowing, returns are likely to be hit. Moreover, slowing growth in Asia will impact banking and financial services growth in Singapore, given its role as a regional financial hub.

The second challenge concerns the government’s efforts to transform manufacturing by raising productivity and investing in high-tech sectors. While these measures are positive, the gestation period is likely to be long. Consequently, manufacturing will be in transition mode, with businesses likely to reduce their order books in the near term in response to restrictions on foreign labor.

The final challenge is to tackle demographic changes, namely slowing population growth and an aging population. Immigration remains a contentious topic, and the government’s population policy will face opposition. As the cost of living rises and the population ages, policymakers will also have to focus more on health and social welfare, especially for low-income households. While funds will not be a problem, implementing these measures amid rising political and social scrutiny will be a challenge.


Akrur Barua

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

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