CFA Society Singapore
SINGAPORE (Sept 28): The global economy has put the bad years behind it and is now in a more dynamic phase that is much more supportive of Singapore’s growth than many realise. Moreover, the regional economies that Singapore services are also reviving, reinforcing the upside for Singapore. And, if that were not good enough, the domestic engines of growth in Singapore are beginning to improve as well, though some restructuring pains do remain. All in all, we could see a nice upside surprise in the country’s economic growth in the near term.
Global economy: putting the bad years behind
The global economy has improved fundamentally. After 10 years of financial crises, policy shocks and depressing political developments, many observers still find it hard to accept this but the facts speak loudly. For the first time in a decade, virtually every part of the globe is enjoying decent growth. The only exceptions are war-torn countries such as Ukraine or Iraq, or countries that are suffering political turmoil or struggling with economic mismanagement such as Venezuela.
Apart from unpredictable or unquantifiable risks such as geopolitical factors that could hold back the world economy, the other features of the current pattern of global growth are supportive of Singapore’s and Asia’s prospects:
Sure, not everything is hunky-dory. We have yet to see a convincing rebound in capital spending and in wage growth in developed economies, reflecting a continued unease among business leaders over the sustainability of growth. But surveys show business confidence rising again, so there are grounds for believing that it is just a matter of time before capital spending gives another leg-up to global recovery.
Singapore’s growth could surprise hugely as a result
Recent economic data suggests that Singapore is poised to enjoy the best economic conditions it has seen since 2011. The most important development is that global demand is feeding through to Singapore more palpably than before:
The global recovery is also helping Singapore’s neighbours. A stronger world economy raises demand for their exports of resources and manufactured goods while also providing more support for commodity prices. Not surprisingly then, the data is showing firming regional demand for Singapore’s exports of goods and services. For example, Asian Currency Unit loans (loans extended outside Singapore, mainly to Southeast Asian countries for things like project financing) are rising again. The uptick in the re-export trade also suggests that the manufacturing supply chains in Malaysia, Thailand, Indonesia and Vietnam are regaining momentum. Stronger regional economies will add further to Singapore’s growth.
Finally, there are signs that the domestic drivers of growth are also regaining some vigour although there is still a long way to go:
What does all this mean for policy?
We believe that there is a strong likelihood that economic growth will surprise on the upside for the rest of this year. The evidence we have sketched out above suggests that the manufacturing, finance, business services, transport and wholesale sectors are revving up strongly and that only the construction sector remains weak. If nothing happens to break the current momentum, we could well see 4% to 5% growth in the second half of this year — growth rates this economy has not enjoyed since 2013.
However, if growth does surprise strongly on the upside, then labour and production capacity will be used more intensively. That means that the slack in the economy, which has been holding inflation back, will diminish faster than policymakers had anticipated. And, if resources start to become fully utilised more quickly than expected, then inflation will start to perk up over time. That has important consequences for monetary policy.
Monetary policymakers have the difficult task of planning policy ahead as changes in exchange rates and interest rates take a year or two to affect the economy. The Monetary Authority of Singapore (MAS) operates a unique form of monetary policy — unlike many other countries, Singapore uses the exchange rate as the main tool of monetary policy. If inflation risks rise, the MAS will allow the Singapore dollar’s trade-weighted value to appreciate faster; if there is little inflation risk but some concern over economic growth, then the MAS will keep the exchange rate’s value flat, as has been the case for more than two years now. If our expectation of much higher growth pans out, then inflation risks will be deemed higher and the bias of policy could well shift towards tightening faster than the markets expect.
The next MAS monetary policy decision is in October. While we are optimistic about growth prospects, it is not clear that conditions will improve sufficiently by then to persuade the MAS to shift policy from a flat exchange rate to an appreciating one. But by April next year, when the MAS has scheduled another policy decision, and if the trends continue, we could see a shift to a tighter monetary policy. That shift could take the form of either a one-off upwards recentring of the trade-weighted value of the Singapore dollar or a shift from the current flat trajectory to a modest appreciation.
The second area of policy is fiscal. But Singapore’s fiscal policy has generally been used to achieve structural objectives, not to manage demand across an economic cycle. Higher economic growth will produce a large rise in revenues, which would mean that the budget surplus will turn out to be much bigger than planned. The government would consequently have more leeway to distribute largesse such as one-off support packages for vulnerable segments of the population — similar to the Silver Support scheme or the Pioneer Generation package. But the greater likelihood is that the government would hold back for now, conserving the surplus to be deployed when the economy is weak and in need of a demand lift.
The final dimension of policy is what economists call “macro-prudential” measures. These have been deployed since 2010, for example, to cool the property market. They include tools such as the Total Debt Service Ratio regulation or the Additional Buyers’ Stamp Duty, which have succeeded in deflating the speculative bubble in real estate. Will stronger growth mean that such measures might be eased soon? We doubt it — a stronger economy and more-confident Singaporeans might help reinvigorate the property sector. Easing the successful macro-prudential measures might lead to a new round of property price increases and generate problems for young couples seeking to buy their first property — not exactly something that this country needs.
Conclusion: Economy in a sweet spot, watch for monetary policy change
The revival of the global economy is likely to persist, creating fertile conditions for Singapore to grow considerably faster than most forecasters had expected. Demand in the region for Singapore’s exports is also rising more firmly while there are incipient signs of recovery in the domestic side of the economy. Consequently, Singapore is likely to see unemployment rates fall, wage growth accelerate and inflation risks, which are currently low, return. That requires a policy shift, which will probably come in April next year in the shape of an appreciating Singapore dollar.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy
This story appears in issue 798 (week of Sept 25) of The Edge Singapore which is on sale now