Singapore is ending 2021 on a high note. The economy is recovering nicely, though not quite as dramatically as we had hoped for.
The pandemic has not been crushed entirely but it is enough in abeyance for the authorities to ease domestic restrictions and open up to the rest of the world judiciously. That gives the still-underperforming segments such as tourism and related activities reason to be more hopeful.
Three themes come to mind as we think about the coming year.
One is that the economic upturn will gather further strength, with the recovery broadening to encompass more sectors. But some imbalances are growing that need attending to.
The second is that big structural changes will knock on our doors sooner than many expect, bringing with it potential dislocations but also great opportunities.
Third, we will have to move quickly to put in place the three things needed to prosper in the new era — policies to deal with emerging imbalances, building resilience and improving the capacity for flexible adjustment and adaptation to structural changes.
We are confident that we can pull off the first two — but we have concerns about the third one.
Cyclical growth prospects are excellent
There are several reasons why we can afford to be optimistic about economic prospects next year.
First, while the covid-19 pandemic could still create flurries of concerns every now and then, we have the improving vaccines, more effective medicines and enhanced clinical management approaches to deal with these problems. The likelihood is that the lockdowns, supply chain disruptions and damaged confidence that afflicted the global economy will not be repeated on the same scale as before, allowing economies across the world to normalise after two appalling years.
Second, two forces will drive up our exports. As the developed economies continue their recovery, our exports will do well. If, as we believe likely, there is considerable pent-up capital spending that will be released in the big developed economies as the year progresses, then our exports of high-tech components will sustain high growth even over last year’s high base. In addition, our hinterland of Southeast Asia is set to enjoy a sustained rebound — that will boost our exports of manufactured goods as well as our re-export trade. Furthermore, as the region regains traction, demand for financial and other hub services will expand, too.
Third, within Singapore, restrictions on activities to tackle the pandemic are set to be further eased, ensuring that domestic spending will also regain momentum. Moreover, as borders open, our supply of foreign workers is likely to improve. The labour shortages that hobbled growth in many sectors should therefore abate over the year. The sectors in the economy that are still under water — construction (21% below pre-pandemic level), retail trade (8% below), transportation and storage (23% below), and accommodation (24% below) — should be able to snap back quickly.
Fourth, the supply side of the economy is in formidable shape. The Economic Development Board has done a phenomenal job in creating a pipeline of large new investments which will translate into large new production facilities opening up in the coming year or two. The start-up space in Singapore is blossoming. The Monetary Authority of Singapore has done well in nurturing an ecosystem for the FinTech industry. There are also signs of some relocation of business headquarters to Singapore from Hong Kong and there is anecdotal evidence of high-net-worth individuals moving more of their wealth to be managed in Singapore.
As of the third quarter, supported by a booming electronics sector for example, the economy was already 0.8% above its pre-pandemic level despite so many segments being under water. With the lagging sectors likely to make up for lost time next year, the economy will enjoy another year of sterling growth, of at least 4%, even taking account of headwinds such as a slowdown in the Chinese economy.
This is good news but there are also some tentative signs of imbalances building up in the economy. Inflation is running at the highest pace since 2013. What is in the pipeline such as likely adjustments to electricity tariffs suggests that price pressures will worsen. The recent pick-up in HDB resale prices, prices of private property and prices of certificates of entitlement suggest that asset price inflation is also perking up.
Post-pandemic structural changes to come sooner than expected
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We will not have much time to catch our breath before ground breaking changes emerge. Under the surface of the world economy, geo-political stresses, technological revolutions, climate change and financial imbalances have been accumulating. Singapore is a small country and so it will be more at the mercy of these big shifts than most other countries:
The tussle between China and the US will intensify. It is likely that the two powers will find ways to prevent these tensions from escalating into outright clashes but the frictions will still affect Singapore. Aggressive trade measures against each other are likely, and that would hurt the expansion of the global trade so vital to us. US efforts to constrain China’s development of advanced technology and China’s retaliation against that could result in dislocations in the technology area where we have placed many bets.
Technological changes will accelerate across many sectors ranging from info-comms to renewable energy to biomedical sciences to new materials. As companies get over the pandemic, they will hurry to catch up with these major advances.
To appreciate this, look no further than at Toyota’s recent announcement that it will spend JPY8 trillion ($95 billion) by 2030 to catch up with its competitors in the electric vehicles space. Singapore must get ready for the speed of change to accelerate.
Business models will change, corporate strategies will need revamps, the economic competitiveness of nations will shift and labour markets will be roiled as some jobs are displaced while there will be intense competition for those with skills for the new era.
In addition, Singapore will more tangibly feel the implications of climate change as countries hasten their efforts to cut emissions. For example, new issues such as carbon border adjustment taxes could be abused for protectionist purposes. Singapore will come under more pressure to demonstrate that it is doing its part to mitigate climate change.
Finally, recent tremors in developed country asset markets and growing financial stresses in China represent the inevitable payback to the stimulative policies employed since the global financial crisis of 2008. Painful corrections in financial markets are probably a matter of time and they will certainly ripple through Singapore as well.
Top-down policy leads the way
Whether the scenario sketched out above produces benign changes or malign outcomes is not pre-ordained. How Singapore as a nation responds is what will determine the net result. The starting point for the response will have to be in government policies.
First, Singapore needs to take early action to nip the potential imbalances in the bud. This is not difficult as Singapore has developed effective tools to do so. Macro-prudential instruments backed up by an expanded pace of home-building can be used to rein in property price spikes if they persist. The measures introduced in mid-December will help in this regard. Consumer price pressures can be addressed through further tightening of monetary policy, using our unique approach of making the Singapore Dollar appreciate faster.
A second area where policy action is needed is in boosting resilience. Even though Singapore is a highly resilient economy, we cannot be complacent as we face a much more turbulent world economy. For instance, we can strengthen resilience by further diversifying our economy by reinforcing our links to the higher-growth parts of Southeast Asia. We can do more to build automatic stabilisers in our fiscal system such as wider social safety nets. An example would be to introduce an unemployment insurance system where spending will reflexively rise when the economy weakens. We should also avoid a rush to produce budget surpluses following the large government spending packages of 2020 and 2021, being careful to calibrate fiscal consolidation with an eye on potential shocks in the global economy.
The third area is probably the most important. The Singapore economy has to reinvent itself to adapt to the post-pandemic future of fast-moving changes and greater turbulence but also tremendous opportunities. Singapore is fortunate in having done many things right as our discussion above on the supply side of the economy notes. The question is whether we have done enough given the speed and scale of changes and the potential costs of not responding sufficiently. This is not to dismiss the worthwhile and earnest efforts of groups like the Emerging Stronger Task Force. But it is our contention that we need to do a lot more.
There are two issues where our response to long-term challenges is concerned.
The first is whether we have done enough to address structural weaknesses in our economy. These structural weaknesses have been raised several times in past columns so we shall be brief here.
Singapore’s adjustment to the tectonic shifts in the global economy will be held back unless the following gaps in our performance are tackled more decisively in future:
• The productivity gap: Singapore’s productivity growth has been disappointing for decades despite countless schemes and programmes that have been put in place. Some observers argue that productivity growth has slipped in many countries, not just Singapore. That is not a good answer. Given our low birth rate and the resistance to largescale immigration, only much higher productivity growth can deliver a decent pace of improvement in living standards.
• The innovation gap: Several surveys of innovation have shown how Singapore has done extraordinarily well in mobilising inputs for innovation. But when the innovation outcomes are compared against the considerable resources devoted to innovation, the result is underwhelming as our innovation efficiency is low.
• The gap in corporate performance: Singapore has an odd corporate structure comprising a highly efficient, multinational company-dominated sector, a large government-linked company sector that has under-performed of late and an indigenously-owned private sector that is not as dynamic as those in successful peer economies such as Taiwan or South Korea. One manifestation of this situation is the lacklustre development of Singapore’s equity market. Once a relative giant in the region, it is now a pigmy compared to Hong Kong. The day will not be far when much smaller bourses such as Manila’s will trade more than Singapore and enjoy more exciting listings than us. Are we sure that this awkward corporate structure is what we need as we head into the uncertain future of momentous changes?
• The gap between headline economic performance and citizen welfare: There are growing concerns about inequality, i.e., about the distribution of wealth and incomes; a possibly slower pace of social mobility; worries about retirement adequacy, care for the elderly and healthcare costs; and over what happens when the 99-year leases on HDB flats is over. Uncertainty over these issues can and do come between the top line economic figures and how satisfied citizens actually feel.
The second is whether we have understood the overarching factors that are at the root of these weaknesses. In order to tackle these gaps, we need to study the structure of Singapore’s economy.
Again, as these issues have been raised in this column before, we shall be brief:
We need to rethink the role of government in the economy. Do we really need such a large government-owned corporate sector or should we have a more aggressive privatisation drive? Should Central Provident Fund savings be concentrated so much in one government-owned institution which is not allowed to invest in the local economy and bourse? Should there be another approach to land sales by the government?
We need a resolution of the debates over immigration. Singapore must remain open to foreign talent but recent developments have made many foreign companies and expatriates here disconcerted. What is the optimal rate of inflow of foreigners and what should their composition be?
Do we need a more comprehensive reform of our education system? Our rankings in some metrics such as the tests of scholastic achievement for 15-year olds appear to be high and our universities have risen high in the global line-up of universities. Yet, many employers especially in cutting edge sectors facing global competition feel that the products of our education system are not quite there yet.
The bottom line: Barring the unexpected, Singapore should have a sterling year in 2022. That gives us the space to undertake the onerous task of restructuring the economy to ensure that it is future-proof. Singapore has managed this before and our hope is that it will do so once again.
Manu Bhaskaran is CEO of Centennial Asia Advisors
Photo caption: Singapore can enjoy excellent cyclical growth prospects this coming year / Albert Chua of The Edge Singapore