Singapore: Subdued growth due to global volatility Asia Pacific Economic Outlook, Q1 2015

Singapore’s near-term growth prospects have been curbed by an uneven recovery in the global economy. An overvalued housing sector and high household debt are also on the country’s list of concerns.

Singapore’s near-term growth prospects have been curbed by an uneven recovery in the global economy. The city-state’s economic engine is fueled by export earnings: In 2013, non-oil domestic exports accounted for 45 percent of Singapore’s GDP. Currently, however, a slowdown in China, a recession in Japan, and near-zero growth in the Eurozone are weighing upon trade in Singapore. An overvalued housing sector and high household debt are also on the country’s list of concerns. Moreover, Singapore’s monetary policy continues to grapple with above-average core inflation due to higher wages and an anticipated hike in interest rates in the United States later in 2015.

Growth picked up in Q3 before dipping in Q4

Singapore’s economy grew 2.8 percent year over year in Q3 2014, accelerating from a 2.3 percent expansion in Q2. There was positive news from both services and manufacturing in Q3. Growth in services was driven by a surge in the finance and insurance subsector. Business services also picked up in Q3. Manufacturing grew 1.9 percent year over year in Q3, a modest improvement from 1.5 percent in the previous quarter. However, growth in manufacturing was driven by biomedical manufacturing clusters, which tend to be volatile. Manufacturing in the electronics subsector, which performed better in Q3 than in Q2, will continue to remain under pressure due to weakness in the global market as well as restrictions on the influx of foreign labor, as evidenced by Singapore’s export data. Electronics exports continued downward, contracting 6.3 percent in Q3. Total merchandise trade declined 3.5 percent from a year earlier, but net exports remained positive due to a sharp slowdown in imports, primarily on account of lower oil prices.

Sluggish growth in global trade is a setback for Singapore’s position as an international trade hub.

Subdued trade activity was evident in the transportation and storage subsector, which slowed compared with Q2 levels. Sluggish growth in global trade is a setback for Singapore’s position as an international trade hub. Another worry for policymakers is the construction sector: Construction slowed from 6.9 percent year over year in Q1 to 3.7 percent in Q2, and has slowed further to 1.7 percent in Q3.

Advance estimates for Q4 indicate that the economy has grown 1.5 percent from a year ago.1 In addition, manufacturing has contracted 2.0 percent, and construction has slowed further. Much of the slowdown in the construction sector is due to subdued private construction activity, which is linked to softness in the housing sector.

Housing sector correction continues

Singapore’s housing sector continues to display signs of weakness. Prices of private residential properties declined for the fourth consecutive quarter. Prices declined 0.7 percent quarter over quarter in Q3 after declining 1.0 percent in Q2. Corresponding rentals also continued downward. The fall in prices stems from government curbs on the private residential property sector. Measures to cool the sector, introduced in 2009 to avert a housing bubble, were intensified in 2013, creating a drag on the demand for residential property. Developers sold significantly fewer private residential units in Q3 than in Q2. Furthermore, the stock of completed private residential units increased in Q3, while the vacancy rate remained at 7.1 percent. The Urban Redevelopment Authority’s flash estimate for Q4 indicates that private residential property prices slipped a further 1.0 percent from Q3.2

Potential risks posed by household debt

Measures to rein in the overvalued housing sector are also aimed at keeping household debt in check. As per Q3 data, household debt in Singapore stood at 76.3 percent of GDP, having expanded 5.6 percent year over year. As of September 2014, housing loans accounted for three-quarters of household liabilities. Additionally, in Q2, debt held by property sector companies as a proportion of equity rose to 65 percent from 55 percent a year ago. A deep and prolonged fall in private residential prices and transaction volumes could hurt indebted property firms as well as leveraged households. The good news is that Singapore’s banking system remains resilient. As of Q3, the banking system’s ratio of housing sector nonperforming loans remained low at 0.36 percent. The Monetary Authority of Singapore (MAS), however, is expected to keep monetary policy tight through the next few quarters, as housing prices remain elevated despite recent moderations. Further correction in the housing market is expected in 2015.

MAS to maintain tight monetary policy

Monetary policy in Singapore is centered on the management of the exchange rate, with the main objective being price stability for sustainable economic growth. The Singapore dollar is managed against a basket of currencies comprising the country’s major trading partners. In 2014, MAS allowed for a gradual and modest appreciation of the Singapore dollar’s nominal effective exchange rate policy band. This policy stance is expected to continue in 2015 in order to keep inflation in check. Though consumer price inflation for all products declined in November, core inflation remains stubborn. MAS’s measure of core inflation, which excludes accommodation and private road transport, is projected to remain above its historical average for the next few quarters on account of higher wages and business costs. This is closely linked to Singapore’s policy on foreign labor. Measures to limit the inflow of cheap foreign labor are aimed at enhancing productivity of the domestic workforce. A tight labor market, though, will ensure that wage inflation persists in the medium term. An important fact that traders will be cognizant of is that Singapore’s real effective exchange rate (REER) has been trending upward compared with the average REER of its regional competitors. The divergence in REER since January 2010 indicates a loss in export competitiveness stemming from Singapore’s economic restructuring efforts to raise incomes and productivity.

Because Singapore’s monetary policy approach targets the exchange rate, its domestic interest rates are closely linked to interest rates in the United States, leaving it vulnerable to a hike in US interest rates in the second half of 2015. Rising domestic interest rates in Singapore could erode economic activity in the medium term, with loan borrowers, in particular, likely to feel the burden of higher debt-servicing costs.

Growth to remain moderate in the next few quarters

Singapore’s growth is expected to remain less than robust in the next few quarters. On the internal front, the government will need to closely monitor the pace and trajectory of the housing market correction to ensure that there are no sudden downturns. Singapore’s 10-year economic restructuring plan, which was launched in 2010, is now at the halfway mark. Interestingly, while income has grown as per plan, productivity growth has been lagging. Until growth in productivity starts to gather pace, Singapore will continue to face wage inflation sans corresponding gains in output. The subsequent loss in export competitiveness, along with an uneven global recovery and subdued global trade, will continue to exert a negative influence on economic growth.