(Sept 25): 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:
- First, the lead indicators remain positive, suggesting that the current pace of slightly above-trend global growth can continue. The Organisation for Economic Co-operation and Development lead indicators have moved positively for almost all the major economies in recent months. Surveys of purchasing managers point to rising new orders across both manufacturing and services sectors.
- Second, in the early phase of synchronised growth across all the major economies, there will be spillover of demand into each other, one country’s recovery boosting demand in the others, which then flows back into the first, creating a mutually reinforcing upwards shift in growth.
- Third, economic fundamentals remain supportive. Oil prices are in a sweet spot — low enough to help energy consumers and keep inflation low, but not so low as to cause shocks for oil producers. With inflation remaining low, there is little need for central banks to tighten so aggressively that they might cause a big slowdown. The modest withdrawal of easy money that we see should not throw the global recovery off track. At worst, bond and equity prices may correct sharply, but the knock-on effects on growth can be contained.
- Fourth, as the world economy normalises, world trade volumes are also picking up — after a couple of years when world trade did not grow in line with global production. In other words, global growth is more import-intensive, and that is good for trade-dependent economies such as Singapore.
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:
- Industrial production grew by a massive 21% in July, with electronics production being particularly strong, driven by growing export demand; non-oil domestic exports rose 17% in August after expanding 7.6% in July.
- Singapore’s entrepôt sector, which is the export-import hub for the region, is also reviving; non-oil re-exports, which is a good proxy for this sector, were up 11.9% in August after growth of 16.7% in July.
- The trade revival is boosting the transport and logistics sectors — sea and air cargo volumes are expanding at a healthy pace.
- Tourist arrivals have also recovered and are now growing at their fastest rate since the middle of last year.
Finally, there are signs that the domestic drivers of growth are also regaining some vigour although there is still a long way to go:
- The most heartening sign is that bank loans have been growing again since October last year — after contracting for a year. The firming pace suggests that businesses are regaining their mojo. • Real estate transaction volumes are rising as developers feel more confident about launching new developments. However, this recovery remains tentative and has certainly not spilled over yet into the construction sector, which remains weak and may have contracted yet again in the current quarter.
- Consumer demand is also reviving as seen in data for retail sales. However, the pace of recovery has been weak. Part of this could be due to the shift from bricks-andmortar sales to online sales. Encouragingly, credit-card transactions are growing much faster than retail sales, so it could well be that retail sales are underestimating consumer demand.
- Similarly, employment conditions, while beginning to improve, are still rather weak — if we look at the conventional data. However, as with the consumer spending data, it is not clear if disruptions such as the sharing economy (Uber and Grab, for example) are creating new jobs that are simply not being counted correctly yet. We suspect that this is indeed the case.
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