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Global Economic Outlook
Singapore: 2011 Outlook
By Michael Manetta
- Exports and manufacturing will slow early in 2011 but recover toward the end of Q2, while the services sector continues catering to domestic and regional demand.
- Barring a severe external shock, Singapore is poised to benefit from more capital flows and trade in services. Financial intermediation, business services and tourism-related hospitality will be big drivers of services-sector growth in 2011.
- While the government pushes for long-term productivity growth, the monetary authority will stay vigilant in its fight to keep inflation in check over the next year.
Growth Dynamics: Services the Engine in 2011
After slowing to 10.6% y/y growth in Q3 2010, Singapore's economy appears poised to accelerate in Q4 thanks to a seasonal uptick in public expenditure, a resurgence in manufacturing orders and moderate inventory restocking. This should bring the 2010 headline growth number above 15%. In 2011, trend growth will return to rates similar to those following the 2001 recession but still below the 2005-07 average of around 8.0%. H1 2011 will be somewhat sluggish due to high base effects, well-stocked inventories abroad and a slight pullback in external demand, and growth momentum should pick up in H2 as these factors reverse.
On the expenditure side, net exports will continue to support GDP in H1 despite a gross export slowdown. This mimics the dynamics of late 2008 and early 2009, when the contraction in imports outpaced that in exports, boosting the trade balance. A significant share of Singapore’s imports is used for domestically produced exports or is re-exported, thus imports are highly sensitive to export fluctuations. Furthermore, to meet demand, producers are likely to pare down the healthy inventories they have heading into H1, adding downside pressure on new import orders. Our forecast for changes in inventories matches this story, predicting two straight quarters of negative contributions to growth before a return to a net positive contribution in Q3.
Figure 1: Net Exports (NX) to Contract as Share of GDP Until Mid-2011
Source: Department of Statistics Singapore, RGE forecast
Employment conditions and income growth have been solid across sectors in 2010 and should remain supportive of consumption growth in 2011. On the margin, labor demand may slacken in Q1 due to a seasonal drop in manufacturing after the holidays, though we anticipate any loosening in labor markets to be short-lived. As such, private consumption should remain a stable, if minimal, contributor to growth through 2011.
Likewise, investment is expected to follow a stable but ultimately flatter growth path next year, having largely recovered ground lost during the financial crisis. To grease the wheels of private investment, the government is actively seeking to boost labor productivity by providing tax incentives and grants designed to encourage capital and skills upgrading. These incentives should overwhelmingly benefit the services sector, as Singapore’s manufacturing sector is already among the most productive in the world on a value-added basis. The success of Singapore’s integrated casino resorts—launched last spring—combined with a steady stream of tourists and rising resident wealth will likely bolster investor interest in retail, hospitality and recreation services, as well as transportation.
An upside investment surprise would support a services sector that is already expected to contribute the vast majority of y/y growth in 2011, as goods-producing sectors adjust to a more uncertain (and competitive) global environment. We forecast the services sector to expand about 7% next year, while goods-producing industries will likely see relatively flat y/y growth due to a weak performance in H1.
Figure 2: Growth in the Goods-Producing and Services Sectors Through 2011 (%, y/y)
Source: Emerging Markets Economic Data, RGE forecasts
Risks: Globalization Is a Blessing and a Curse
External trade remains Singapore’s main vulnerability. China and Hong Kong together account for nearly 25% of Singapore’s revenues from goods exports, with roughly 40-50% of that demand derived from final demand in advanced economies. Another 20% of Singapore's exports go directly to the G3. Though the likelihood of a dramatic slowdown in the global economy now looks slim, even weaker-than-expected external demand—due to debt restructuring in Europe, continued weakness in the U.S. labor market and the byproducts of these dynamics—would weigh heavily on exporters, particularly electronics manufacturers. Still, with Singapore’s manufacturing sector diversifying toward capital machinery and biomedical goods, a fall in consumer electronics demand abroad would be partially mitigated if investment and health-care demand remain elevated.
Overall, we see far more upside than downside risks over the next four quarters. Singapore is well-positioned to benefit from rising incomes in Asia, as evidenced by the increase in tourists from the region as well as the growing share of services exports (which tend to cater to regional customers) in total exports. Rising incomes in Indonesia, China and India in particular should continue to drive growth in hospitality, gaming and other tourism-related industries.
An increase in global capital flows also stands to benefit Singapore, which is a major financial hub for the region. The financial account was deeply negative in Q3, with a marked accumulation of foreign assets offsetting large inflows of portfolio investment. Taken together, these large gross capital flows reflect opportunities for Singapore’s financial services industry to intermediate in regional transactions: Financial services averaged more than 12% y/y growth in the first three quarters of 2010. Meanwhile, net FDI as of Q3 had already surpassed previous highs, evidence that Singapore’s fundamental appeal to investors remains strong.
Policy Implications: Raising Productivity and Lowering Prices
Three major policy themes emerged in 2010: raising productivity, controlling housing prices and tightening monetary policy. In addition to fiscal incentives aimed at encouraging companies to invest in productivity enhancements, the government will continue to gradually raise the foreign worker levy over the next three years in an effort to reduce firms’ dependence on cheap foreign labor. Yet firms may simply hire foreign workers anyway and pass the added cost on to customers (as analysts speculate will happen in the construction industry), with no discernable improvement in labor productivity.
Rising construction costs would exacerbate already sizzling housing prices. Data through Q3 2010 suggest that the government’s late August effort to cool housing prices may have slowed turnover and price increases in September. However, further capital inflows into fixed assets in the months ahead may require another round of cooling measures, which the government has already said it is considering.
Such measures would be part of a broader effort to keep inflation in check. We expect headline inflation to reach 2.8% in 2011 from 2.7% this year, though this forecast is predicated on inflation expectations dipping below 3% by the end of Q1. The Monetary Authority of Singapore (MAS) has few policy tools at its disposal other than management of its exchange rate, appreciation of which helps dampen imported price increases. The recentering and steepening of the exchange rate band in April, followed by additional steepening in October, helped quell inflation expectations in the near term. However, given expectations for relatively high inflation in H1, the MAS will likely steepen and widen the exchange rate band again in April 2011. Furthermore, we anticipate an upward recentering of the band in October as the MAS tries to keep a lid on both cost-push inflation, driven by higher world commodity and food prices, and demand-pull inflation from a positive output gap. Having flatly ruled out imposing capital controls, the MAS will continue managing the impact of inflows on money supply growth via sterilized interventions in FX markets as it guides the Singapore dollar’s value. M2 growth has nonetheless accelerated on robust expansion of credit to the private sector, suggesting that the most potent upward pressure on prices will continue to come from domestic demand.
Figure 3: Nominal Effective Exchange Rate (NEER) Appreciation Keeps Up With Inflation Better After April 2010 Tightening
Source: Bloomberg, Emerging Markets Economic Data