Share this
Digg
Del.icio.us
StumbleUpon
Netscape
Yahoo
Technorati
Googlize this
Facebook
Export PDF
Print
E-mail
DESPITE THE RECENT market optimism, the global economy remains on edge. It is not that the risks in Europe, China and elsewhere have disappeared: Markets are rising on the hope that policymakers will miraculously resolve the formidable challenges. In this context, Singapore cannot remain complacent. As a small, highly open economy, its vulnerability places an inordinate burden on policy to be proactive. As we approach two key policy milestones — the budget at end-February and the monetary policy statement in April — it is worth thinking through how investors and businesses might be affected by policy changes in Singapore.
Global economy: Headwinds dominate
Markets have rebounded because the US economy appears to be improving. Moreover, investors believe that a decelerating economy in China will persuade policymakers there to ease monetary policies and that European leaders will do just enough to prevent further bad news out of the eurozone. But a cold, hard look at the facts suggests that developments in Singapore’s environment are not likely to be all that positive:
- The US economy remains at risk: It has certainly improved: The labour market has unambiguously strengthened while the housing market, where the crisis started, is finally finding a bottom. The question is whether this can be sustained, and the answer is no. The bottom line is really what the forward-looking indicators tell us. The ECRI (Economic Cycle Research Institute) lead indicator, which has an excellent track record of forecasting slowdowns in the US, is indicating a slowdown from current levels soon. And this is not surprising as the stimulus effect of previous budget measures are giving way to a contractionary fiscal stance and the uncertainty and gridlock in US politics is likely to make US businesses hesitant to hire or expand capacity. In addition, US growth in 1H2011 was flattered by two factors that cannot be sustained — a fall in the savings rate of households and businesses rushing to take advantage of tax incentives for capital spending, which have now expired.
- Eurozone stresses continue to build: Yields on sovereign bonds of key eurozone countries such as Italy and Spain continue to rise while Greece is struggling to meet the conditions needed to secure donor funds — failure to do so will mean a default in March when a large debt repayment is due. Economic activity continues to lose momentum and popular anger against austerity measures is rising.
- Japan’s recovery from triple disasters is losing momentum: Latest data shows business confidence ebbing, capital spending weakening and consumer spending faltering. While spending on post-earthquake reconstruction will keep Japan’s economy growing this year, it is also clear that the strong yen and weaker demand in Europe are hurting its recovery.
- China’s economy decelerating rapidly: Import growth weakened sharply in December, suggesting domestic demand is at risk. Although the purchasing managers’ index shows the economy rebounding in December from weakness in October and November, weaker export demand, a fall in realestate prices, failures of land auctions that deprive local governments of desperately needed revenues to repay debts and rising wage costs following sharp rises in minimum wages this month are all taking a toll. It is too complacent to say that policymakers will be able to prevent a further slowdown and the financial stresses that will inevitably follow. They have the resources to soften the blow of a slowdown but they cannot prevent this slowdown. For the next one to two quarters, we are likely to see weaker demand out of China.
So, external demand and global financial dynamics will probably hurt Singapore’s economy in the coming quarters. Unlike in 2008/09, Singapore will not face a short, sharp financial shock with the global downturn quickly reversed by massive policy response. This time, we will see a prolonged period of mediocre global demand interspersed with occasional financial stresses that fall just short of a fullblown crisis — and that is what policy should address.
Domestic economy: Some positives but not enough
But there are also domestic headwinds. Government measures to cool the property sector will certainly slow construction and real estate-related services. Tighter restrictions on foreign workers will also constrain businesses in the hospitality, construction and manufacturing sectors, in particular. At the same time, wage, rental and other business costs continue to rise.
Of course, there are also some domestic positives. Some large new manufacturing plants will start operations this year, adding to output growth. The Iskandar Region across the Straits of Johor is taking off with a flowering of opportunities for Singapore businesses as Singapore- Malaysia economic cooperation reaches the most amicable level in decades. Strong loan growth suggests that domestic banks are able to take market share in regional funding activities from the global banks that are under stress.
Still, it is quite clear that the headwinds will dominate over the tailwinds for Singapore. The contraction in economic activity in 4Q2011 shows this clearly. There is, therefore, a greater burden of responsibility on economic policy than usual.
