Singapore: Cause for optimism

Singapore: Cause for optimism

Singapore: Cause for optimism

Asia Pacific Economic Outlook, October 2013

Singapore’s economic fortunes seem to be improving, with this quarter’s revival in manufacturing and exports. However, the city-state will continue to face challenges—both cyclical and structural.

SingaporeEconomic fortunes seem to be improving in Singapore, with GDP in Q2 2013 expanding at its fastest pace in two years. The quarter witnessed a nascent recovery in manufacturing, with exports also reviving due to better economic activity in the West. Meanwhile, domestic private consumption remains strong as households benefit from wage growth and low unemployment. However, the city-state will continue to face challenges—both cyclical as well as structural. Slowing growth in emerging markets, especially in Asia, could dent export demand. In the medium to long term, the economy will encounter rising labor costs, given increasing restrictions on foreign workers and an aging population.

Healthy growth in Q2 2013; positive news in manufacturing

The economy picked up in Q2 2013, growing 3.8 percent year over year, up from 0.2 percent in Q1. While services growth more than doubled to 5.5 percent during this period, it was the reversal of fortunes in manufacturing that drew much attention. Manufacturing grew a mere 0.2 percent; however, this was a turnaround from the contractions of the past three quarters, including a 6.7 percent fall in Q1 2013. Growth in the segment was driven by higher electronics and biomedical production. The former, which accounts for one-fourth of total exports, posted growth for the first time in nine quarters. Encouragingly, the positive trend in manufacturing continued in July, with output rising 2.7 percent year over year, aided by strong contributions from transport engineering and electronics clusters.

On a cautionary note, the uptick in manufacturing could prove short-lived if export orders decline due to slowing growth in Asian markets. Also, biomedical production is volatile in nature; Q3 2013 growth in this segment is likely to decline. Recent data highlight some of these concerns. For example, the manufacturing purchasing manager’s index (PMI) for August came in at 50.5, the slowest pace of growth since February. However, on the brighter side, export orders went up during the month, with the electronics PMI also rising.

Since mid-May, the Singapore dollar has fallen 2 percent against the greenback, way better than the above–15 percent declines in the Indian rupee and the Indonesian rupiah.

Exports revive even as consumption remains strong

Exports, which amount to more than 1.5 times the country’s GDP, recovered in Q2 2013. In real terms, they expanded 3.1 percent, a significant improvement from the 4.1 percent decline in Q1. Exports demand in the short to medium term will come up against two opposing forces: higher economic activity in the United States and Europe, and slowing growth in China and other Asian economies. Consequently, exports growth will average only 0.7–1.2 percent this year, with the pace likely to pick up to 4.0–4.5 percent in 2014.

Meanwhile, private consumption continues to remain strong (2.7 percent growth in Q2 2013), aided by wage gains due to a tight labor market. Although unemployment rose marginally to 2.1 percent in June from 1.9 percent in March, curbs on foreign workers are likely to keep wages high. According to the Monetary Authority of Singapore (MAS), wage growth is likely to be about 3 percent in 2013, up from 2.3 percent in 2012. Consequently, private consumption growth in 2013 is likely to end up in the range of 2.5–3.0 percent. Consumers, however, could face pressure from slowing asset prices and a mild uptick in inflation in the second half of 2013.

Equity prices have fallen since mid-May, when the US Federal Reserve (Fed) first hinted about winding down its quantitative easing (QE) program. Since then, Singapore’s Straits Times Index has shed 12 percent. House prices have also slowed this year due to a slew of government measures, including rebates to public housing.

Weak investments to weigh on growth in 2013; reversal likely next year

Investment was a drag on the economy in the first half of 2013, with gross fixed capital formation declining 4.8 percent year over year. Subdued external demand and a slowdown in civil construction are the likely key causes for this. However, the scenario is expected to change, albeit slowly. Investments will benefit from planned government investments in infrastructure, primarily transportation. Also, to counter labor supply restrictions, firms are likely to invest more in enhancing productivity. The government is encouraging this and has earmarked about $4 billion to aid firms in the process. However, the impact of all these actions is likely to be felt more in 2014–15 than this year. Consequently, fixed capital formation in 2013 will dip relative to 2012, partially offsetting gains in private consumption and exports.

Not surprisingly, higher government spending on infrastructure, health, and social welfare will aid wider GDP growth. Overall, the economy is expected to grow at 2.3–2.6 percent this year. As investments recover in 2014 and exports gather pace, GDP growth is likely to move up to 3.4–3.8 percent. However, a return to growth above 5 percent, as witnessed in the previous decade, is not likely before 2016–17.

Inflation edging lower; MAS likely to encourage currency stability

Price pressures have eased since Q2 2013, although a tight labor market poses risks. Inflation fell from an average 4 percent year over year in Q1 to 1.9 percent in July, thanks to government intervention to counter housing and transportation costs. The latter fell 1.3 percent in Q2 2013, compared to a 9.7 percent rise in Q1 owing to tighter conditions for vehicle loans and higher taxes on luxury cars. A stable Singapore dollar has also helped counter inflation, and MAS is likely to continue supporting the currency. The currency has remained fairly unscathed relative to Asian peers post the Fed’s hint of winding down QE. For example, since mid-May, the Singapore dollar has fallen 2 percent against the greenback, way better than the above–15 percent declines in the Indian rupee and the Indonesian rupiah. However, as inflation is reined in and there is greater clarity on QE tapering, MAS is likely to review its strategy as unabated currency strengthening will lead to a loss in export competitiveness.

A new challenge for the PAP

The ruling People’s Action Party (PAP) is likely to face increasing questions about its economic agenda. Arguments have become sharper after a February 2013 white paper discussed the government’s proposal to increase the population, to 6.5–6.8 million by 2030 from the current 5.3 million. This has stoked fears of an influx of foreigners, with negative impact on wages, house prices, infrastructure, and equality. Critics have also argued that the decline in the share of citizens in the population will dilute the “Singapore identity.” The manner in which the government tackles such criticism will determine the future course of politics in the country. Although the PAP is likely to hold on to power, economic growth might not be enough to quell political and social discontent.


Akrur Barua

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

Asia Pacific Economic Outlook, October 2013: Singapore
Illustrations by Jessica McCourt (Cover), Stephanie Dalton Cowan (Singapore)