SINGAPORE ENDED THE year on a high note, with its economy expanding 12.5% in 4Q2010 and by a sizzling 14.7% for all of 2010. There is certainly much to celebrate in this. The economy was not just bouncing back from a recession in 2009 — output, exports and employment have all comfortably exceeded pre-crisis levels and moved on to even greater heights. New growth drivers have emerged — whole new industries such as alternative fuels and the integrated resorts have added a new vitality to our economy. Moreover, the signs for the coming 12 months look fairly good in that many new and large manufacturing plants are starting operations this year, while the integrated resorts will continue to expand. With the regional economies such as Malaysia, Indonesia and Thailand also revving up, our regional hub services will also do well. All this should give Singapore a buffer against possible weakness in the large developed economies.

 

Not surprisingly, the media and investors have become very optimistic. While there are good reasons to celebrate, it is also wise to examine some of the less exciting dimensions of our economy so that we do not get carried away and forget our vulnerabilities. 

 

A key policy challenge is that the economy’s rapid expansion is straining resource utilisation. The labour market, in particular, is very tight. With the resident unemployment rate falling to 3.1% in 3Q2010, we are in practical terms near full employment. Given the long-term need to reduce dependence on foreign workers, the government has — quite rightly — reduced the number of foreign workers allowed into Singapore: This means that the usual vent for labour-market pressures is not available. So, we will see strong growth in wages, which is nice to have but only up to a point. If wages rise too fast, the cost of living in Singapore will also rise very rapidly and competitiveness could be hurt.

 

In fact, our estimate of the overall level of resource utilisation — the output gap, or the gap between what the economy can produce and the demands made on it — is flashing a warning sign that inflation will surge. If the economy grows by about 5% in 2011 as seems likely, then resource utilisation will certainly reach difficult levels. This means that wages, rentals and all kinds of input costs are bound to rise strongly this year, causing inflation to accelerate. This will add fuel to the fire already raging as private transport costs are driven up by higher COE prices and supply problems cause global food prices to rise. Don’t forget that the ultimate reason COE prices are rising is that high growth has caused severe congestion, forcing the authorities to limit further growth in the car population more rigorously.

 

 

One striking feature of recent economic growth has been how private consumption expenditure (PCE) has consistently lagged the growth of GDP. For the first three quarters of 2010. GDP grew close to 16% while PCE rose about 6%. Since consumption spending is a better measure of the economic welfare of our people than GDP, this is worrying. In recent years, PCE growth has generally been slower than GDP growth, except in periods of lacklustre economic growth or during recessions. What is also interesting about 2010 is that PCE growth has been slow despite the fact that unemployment has fallen to very low levels and consumer confidence (as measured by Nielsen’s Consumer Confidence Index for 3Q2010) is near record highs.

 

The reason for this apparent anomaly is that real incomes of the employed have not really kept pace with GDP growth, highlighting another less desirable characteristic in Singapore’s growth performance. According to the 2010 Workforce Report, median monthly incomes rose just 1% in real terms in 2010, when the economy grew 14.7%.

 

Another feature of recent growth has been that companies are not investing as vigorously as before. For the first three quarters of 2010, investment grew by around 5%, hardly a good bounce from the 3.3% contraction in 2009. If PCE and investment — both adding up to domestic demand — are lagging, the upshot is that our economy has become much more reliant on external demand than ever before, not a very healthy development when the external environment is so fraught with uncertainty.

 

A final reason for concern lies in our productivity performance. While labour productivity growth accelerated to a healthy rate of about 12%, with especially strong performance in manufacturing and construction, this does not make up for several previous years of desultory performance. Without strong productivity, our competitiveness will be hurt and it will not be possible for wages to rise much.