Rising global economic tide may not lift Singapore's boat

The global outlook is forecast to improve in the coming year but Singapore may not be riding that wave.

Economists cited several structural hurdles for the disconnect between global growth prospects and Singapore's trade and export-oriented economy.

Any benefits the Republic can reap from a brighter 2017 world economy will also be tempered by the health of its economy. "This time it's different," said Francis Tan, UOB economist. "Unlike in the past where there seemed to be quite a correlation between global growth and Singapore's growth, sadly there's a disjoint now."

The World Bank forecasts 2017's global growth at 2.8 per cent, a tad ahead of 2016's growth, which is expected to be at 2.4 per cent.

This should normally bode well for Singapore's economy as there will be stronger external demand for its goods and services.

But economists no longer share such a view.

Their growth predictions for 2017 run the gamut from the cautiously optimistic, like UOB's 1.8 per cent, to the outright pessimistic, like Nomura's 0.7 per cent, which was lowered from an earlier one per cent.

Acknowledging that its forecast was among the most pessimistic, Nomura economist Brian Tan said: "It's very difficult for us to share the government's optimism."

Economists polled by the central bank put the growth at a median forecast of 1.5 per cent. The Ministry of Trade and Industry (MTI) itself does not see 2017's growth deviating far from its initial forecast for 2016.

At one to 3 per cent, MTI's initial forecast for 2017 is the same as that it had first projected for 2016 - itself a year that wasn't much to rave about.

Prime Minister Lee Hsien Loong is likely to reveal the full year's growth in his New Year speech this weekend. MTI will follow up with advance estimates of fourth-quarter growth numbers next Tuesday morning.

But even before 2016's full-year numbers are in, economists are already looking ahead to 2017, albeit with a new perspective.

Among the structural changes highlighted is the changing nature of US trade - the economic power just isn't importing in the same volumes anymore.

UOB's Mr Tan calculated that for the global recovery between 2002 to 2008, US imports grew at an average annual pace of 9.5 per cent, rising to 10.4 per cent in the next recovery phase from 2010 to 2013.

But from 2014 till today, import volumes actually shrank 1.3 per cent. This may have been partially due to the stronger US dollar, as it reduces the nominal value of imports. But the UOB economist believes there is a deeper structural shift underfoot. "Onshoring is also a very important factor. From the growth of the shale oil sector and some US manufacturers moving back to the US, it's reducing its reliance on the world."

Then there is also the rebalancing of the other economic powerhouse - China. Global value chains, which Singapore is deeply plugged into, will see some disruption as China shifts to a consumer-led economy. How stable this transition will be throws more uncertainty into the equation.

All these changes mean that Singapore is finding it harder to export its goods and services based on current models, said economists.

ANZ economist Ng Weiwen said this means there is a need to rethink fiscal or even monetary approaches in supporting growth, as fundamentals have changed.

"Structurally, business models here are export-oriented. That's where the problem lies, and it's not really something an exchange-rate-based monetary policy approach can adequately address," he said.

As if to drive home the point, a recent report from Standard Chartered said that trade woes, exacerbated by weakness in the oil and gas sector, makes Singapore one of its least preferred markets in Asia excluding Japan.

Global shifts aside, economists also worry about domestic issues in Singapore. The biggest spot on their radar is the health of its labour market.

With disappointing employment data coming out in recent months and a greater mismatch in skills between workers and jobs, they wonder how soon and how much can the economy benefit from a global pick-up.

"We are all forced to take a deeper look at our economy. It's not about the hardware now, but more about the software: do our people have the necessary skill sets to take advantage of what new trends and disruptions there are?" said Song Seng Wun, CIMB economist.

Beyond labour pains, Singapore's high levels of indebtedness are also cause for concern. Economists say US President-elect Donald Trump's expansionary fiscal stance is expected to hasten the pace of interest rate hikes by the US Federal Reserve. They expect anywhere from two to four hikes in 2017. This will shake Singapore's financial stability, as borrowers will find it more costly to pay off their debts.

But if there was one view the economists shared, it was that they do not foresee a broad-based stimulus from the government in the coming months. This is because a recession is not the government's baseline scenario for 2017 yet.

"This is not a recession yet; there are still pockets of resilience," Nomura's Mr Tan said of his research house's bearish assessment.

"Any fiscal stimulus in the coming Budget will probably be targeted, but we have to start looking into new sectors for the economy to generate growth."

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This article was first published on Dec 29, 2016.
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