Singapore: Bouncing back to health?

• Manufacturing was solid. The once-beleaguered manufacturing sector is responding to the return to health of global and regional trade flows, expanding 6.6% in 1Q2017 after inching up only 3.6% in 2016. The electronics and precision engineering clusters showed particular strength, but biomedical manufacturing, transport engineering and general manufacturing lagged behind.
• Construction activity contracted — for the third quarter running. Clearly, the slowdown in private-sector construction was too great to be offset by stillvibrant public-sector infrastructure and related spending.
• Services sector still a shadow of its former self. Growth in services stood at 1.5% y-o-y in 1Q2017, better than the 1% at end-2016, but well below the 3.5%-to-6.5% range seen from 2013 to 2015. What growth there was in this sector depended heavily on the recovery in external trade — it was trade-related areas such as wholesale trade and transportation and storage that grew more strongly.

Still, there are grounds for optimism looking ahead
First, the forward-looking indicators such as new orders received suggest that activity can accelerate in the coming months. Import growth has been very strong, suggesting that businesses were importing intermediate goods for future production as well as capital goods to expand capacity.

Second, there is reason to expect the external sector to gain further momentum. The Organisation for Economic Co-operation and Development lead indicator, which forecasts economic growth in the developed economies accounting for about half of world demand, has been rising and now points to above-trend growth over the remainder of the year. The lead indicators for some of the large emerging economies are also looking healthier. What is more, oil prices remain in a sweet spot — low enough to spur demand among oil-consuming consumers and companies, but not so low as to wreak havoc among oil-producing economies and oil-servicing companies. Not surprisingly, therefore, for a trade-dependent economy, Singapore’s exports are firming up — non-oil domestic exports grew about 15% on average in the first three months of the year.

Third, technology demand also seems to be rising again. Semiconductor sales are growing at the fastest pace in six years — that is mighty positive for an economy such as Singapore’s that is heavily geared towards electronics production. What was encouraging about technology demand is that it is rising pretty much across the board, in all the major economies.

Fourth, there are signs that the domestic property sector is stabilising. The pace of price falls in residential property is easing while new home sales seem to be steadying as well. This is important because a healthy property sector spills over into many other areas — construction, mortgage lending and real-estate services.

Some parts of the economy continue to lag, though
Still, not everything is running smoothly.

• First, domestic consumption spending remains lacklustre. Retail sales fell 2.5% y-o-y in February — in fact, if we take strong car sales out of the picture, retail sales were down an even worse 4.9%.
• Second, employment conditions have not been improving much. Job creation has slowed drastically — only about 16,800 jobs were created in 2016, the slowest pace since 2003, while redundancies rose to their highest levels since the global financial crisis.

So, what is really going on? The best way to understand the Singapore economy is to picture it as a three-speed one.

There is, first, the trade-related sector, which will be an outsized winner from the turnaround in global trade. We think the recoveries in the developed economies and in China will reinforce one another, producing an upward spiral in global demand. The improving confidence should also result in a revival in capital spending, which will help keep the global rebound going for a while. That will be good news for Singapore’s export-focused manufacturing activities such as semiconductors and precision engineering, while services that support the trade sector, such as wholesale trade, logistics, transport and warehousing, will also do well.

Another separate part of the economy with a different set of drivers is social services, which should fare decently as the government steps up spending on social welfare such as programmes for the elderly, healthcare and education.

Then, there are the non-government, domestically oriented services, which currently remain moribund in the light of the fragile labour market. But, even here, there is room for hope. The labour market usually takes time to recover as businesses wait to be sure that the recovery in the economy is sustainable before stepping up their hiring and feeling comfortable about paying higher wages. Since we believe that the recovery described above can continue, we should begin to see improved hiring and therefore consumer confidence over the coming one to two quarters. If the property sector does continue to stabilise, this improvement in consumer confidence could well occur faster.

What can go wrong?
Even a cursory reading of the newspapers shows us what an uncertain world we live in.

Geopolitical risks are especially high. For instance, North Korea’s pursuit of nuclear weapons seems to have reached a stage where the US may well be forced to take action. The regime has made progress in developing nuclear weapons as well as the missiles that could deliver them to targets as far as some parts of the US. Markets have become nervous because all the options available to the US to pre-empt this outcome are horrendously risky, which seems to suggest that there is no possibility of a good outcome. However, simply because the risks of unilateral military action by the US are so high, we are quite sure that the US will proceed cautiously while China will work behind the scenes to contain the dangers.

A more salient fear is the swing to inward-looking populism and more radical ideas across the world. The French presidential election could well produce an upset and bring to power a faction with radical ideas such as leaving the European Union. If that happens, the fledgling European recovery would reverse and the sovereign debt crisis there, which has been stabilised, would erupt again.

In the US, while President Donald Trump has mercifully drawn back from some of his more exotic policy prescriptions, he is still pushing his America First line — as we saw with the recent new approach to work visas for high-tech foreign workers.

In Indonesia, it appears that appeals to religious sentiment have succeeded in ousting a dynamic governor of Jakarta who had a good track record of achievements. This could encourage others to make similar appeals to religious intolerance, which would be damaging to political stability there.

The main concern we have right now, though, is that increasing uncertainty over all these issues could prompt businesses around the world to hold back from hiring more workers and expanding capacity through the kind of high-multiplier investments that are needed to keep the recovery going.

This risk is most pertinent in the US, where Trump suffered a serious setback when he attempted to undertake radical reforms to healthcare. That failure has got many worried about his ability to push through tax cuts and higher infrastructure spending, as well as drastic deregulation, the three factors that were key to explaining the higher business confidence that has boosted the American stock market since Trump’s election in November. The tax reform package, in particular, seems to have run into much resistance since it is not clear how the lost revenues can be replaced sufficiently so that the budget deficit does not explode. There are also concerns that radical members of Congress could object to the continuing resolution needed to keep the American government funded — that bill has to be passed by the end of this month, failing which, there could be a government shutdown, which would seriously damage business and consumer confidence.

Conclusion: What should we expect on the policy front in Singapore?
First, monetary policy has done its job, so we should not expect any further big moves by the Monetary Authority of Singapore. The economic momentum provided by a more vibrant external sector has boosted cyclical growth prospects for Singapore, while the inflation outlook is also supported by the improving economy, higher oil prices as well as administration price hikes covering water, diesel and parking charges. MAS has opted to maintain the trade-weighted value of the Singapore dollar at a stable level and has signalled that it intends to maintain this policy stance for an extended period of time.

Second, with the economy now steadier, we do not expect big moves on administrative policies either. The restrictions in the property sector are likely to remain in place, although there might be occasional tweaks. Neither is there likely to be any significant liberalisation of restrictions on importing low-skilled foreign workers. Moreover, it is probably still appropriate for macro-prudential policies to remain conservative so as to prevent excessive borrowing at a time when debt levels in Singapore have risen.

Third, the focus may therefore shift to long-term strategies. A few areas stand out. The Committee for the Future Economy outlined some broad strategies for taking Singapore into the next phase. What businesses need is for these broad strategies to be supplemented with more details so that they can better appreciate where to place their bets. One area of particular need is how to alleviate the high cost structure in Singapore. Now that the immediate risks to the economy have been contained, more attention can be focused on this issue that Singapore businesses are struggling with.

In short, the economy is enjoying a nice cyclical bounce. While there are some near-term risks to this recovery, we believe they can be contained. We have to use the opportunity to push forward with detailed strategies to resolve our challenges and structural weaknesses.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy

This article appeared in Issue 777 (April 24) of The Edge Singapore.