After exuberantly celebrating 50 years of independence in 2015, Singapore came down to earth with a bit of a bump in 2016. Economic growth slowed further, employment conditions weakened, property prices continued to fall, retail sales ex-cars were weak and bad loans accumulated in some sectors. Looking into 2017, a mood of caution persists in business surveys, unsurprising since local firms remain concerned about high costs, weak markets and an increasingly uncertain global environment.

There are good reasons to be concerned because times are tough, but there are also some reasons to be confident that Singapore will overcome these challenges as it has done before. We think that there are four global and two domestic drivers that will determine the country’s performance in the coming year.

Global demand cycle: Positive
Singapore is a small and highly open economy that is extremely sensitive to the ups and downs of the global cycle and the volatile fortunes of its regional hinterland. With lead indicators for world trade improving, a rebound in global demand is underway and will produce an upside surprise to economic growth for a number of reasons:

  • First, Singapore’s exports remain well correlated with demand in the developed economies of the US, Europe and Japan. There are signs that all three are likely to enjoy somewhat better growth next year than in the past two years. In particular, the US economy is, we believe, gathering momentum rapidly as business confidence soars on expectations of the new administration delivering radical tax cuts, higher defence spending and wide-ranging deregulation. Since these additional boosts come just when better functioning labour, housing and credit markets were anyway pushing up the economy, economic growth is likely to surpass market expectations.
  • Second, our exports are particularly sensitive to capital spending, which has been unusually subdued since the 2008 crisis. There are incipient signs that US companies are likely to step up investment in new technologies and new capacity as recent data on capital goods orders has shown an improvement. Indicators of technology spending such as the Federal Reserve Tech Pulse index are rising, encouraging news for Singapore’s electronics sector.
  • Third, oil prices are likely to trade in a range of around US$50 to US$60 a barrel, which will be optimal for the Singapore economy — low enough to spur global economic growth but rising slightly to help sectors such as offshore and marine, which has been severely hurt by the oil price collapse.
  • Fourth, demand in Singapore’s regional hinterland for its regional hub services is also likely to recover. Indonesia endured two years of rough adjustment following the fall in oil and commodity prices and President Joko Widodo’s courageous reform of fuel subsidies. The subsidy reform slowed demand initially but will improve economic performance over time. Now, Indonesia’s trillion-dollar economy is set to accelerate. Malaysia has also gone through a difficult patch, similarly hit by falling oil and commodity prices as well as the imposition of the goods and services tax, another reform which tends to initially hurt consumer spending but improves economic efficiency over time. More importantly, Malaysia is one of the most open economies in the world and will benefit from the uptick in the global demand cycle described above. In addition, Thailand, Vietnam and the Philippines are also set to perform strongly in 2017. All this means more activity for our port, airport and financial centre, while the entrepot sector which lost momentum in recent years should also regain some verve.

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