Singapore economy 'still a regional bright spot'

Two leading local economists are confident that Singapore, and Asia more broadly, will shrug off the effects of the expected scaling back of the massive United States stimulus programme.

DBS chief economist David Carbon said on Tuesday that Asia, including the Republic, will likely power ahead economically next year even if the tapering of the so-called quantitative easing (QE) programme occurs.

"This idea that the US Federal Reserve and its QE gave us a lot of (capital) inflows and we have to worry about a lot of outflows is just frankly wrong," he said.

"When you look at it from the Fed's balance sheet perspective, or when you look at it from Asia's inflow and outflow perspective, there was no inflow here for the past two years."

Separately, Bank of America Merrill Lynch economist Chua Hak Bin said on Tuesday the impact of tapering on Singapore was likely to be limited.

Global markets have been on tenterhooks for months over the looming reduction of the programme, which has pumped vast sums of cheap money into the global economy. News on the timing of the tapering could come as soon as early tomorrow (Singapore time) after the US Federal Reserve meets.

Dr Chua said even if the Fed scales back on the programme in March next year, that will translate to only a rise in short-term interest rates in Singapore in the first three months of 2016.

He said the impact of tapering ought to be "fairly limited" here if it doesn't translate to a "sudden stop in capital flows" to Asia.

Dr Chua added that its negative impact would be mitigated by the fact that tapering implies there is stronger US economic growth, which could mean more demand for Singapore exports.

Still, Mr Carbon believes tapering, when it occurs, may have a profound effect on the US housing market and world markets next year. He told a briefing at the bank's Marina Bay Financial Centre office that the US housing market is most at risk.

When the Fed started talking about tapering earlier this year, mortgage applications fell by 15 per cent, he said. Actual tapering, he said, could cause a drop in mortgage applications, sales, construction and prices as the Fed is buying US$40 billion (S$50 billion) of housing bonds a month as part of its US$85 billion monthly bond-buying programme.

The housing bond purchases are equivalent to five times the value of all new homes sold in the US every month - US$8 billion.

"This is what textbooks would tell you would happen: if the Fed stops buying all this stuff, prices would fall, construction would fall, sales would fall."

If the housing market starts to decline, that could cause more uncertainty in the global stock markets as investors question if the Fed would make a U-turn, by cranking up stimulus again.

Mr Carbon expects the Fed to start tapering in April, as some Fed officials are worried about inflationary pressures. But if things do not take a turn for the worse, US growth could creep up to 2 per cent in 2014 from an estimated 1.6 per cent this year.

On another front, Dr Chua expressed concern that Singapore was likely to benefit less from the nascent global economic recovery than it has done in the past.

He said an upswing in the Republic's economic growth "will not be as pronounced" this time.

Even so, he said that Singapore was still a regional bright spot.

He expects Singapore's economic output to expand 3.7 per cent this year from last year and 3.2 per cent next year.

His forecast is slightly below the consensus of 3.8 per cent estimate in a Monetary Authority of Singapore survey last week.

This is because Singapore's "search for high-productivity growth is still elusive", he said.

Dr Chua told a briefing at the bank's OUE Bayfront office that the economy here has been able to "swing up from the exports manufacturing side" in the past but recent weakness in manufacturing has cast doubt on whether that can continue.

One major reason is that the manufacturing sector here, which makes up slightly more than a fifth of the economy, is struggling with higher costs and decreased competitiveness. Domestic costs have climbed amid economic restructuring and stricter foreign worker policies. These mean Singapore's potential economic growth would likely undershoot previous government estimates of 3 to 5 per cent, he said.

Efforts to boost productivity also seem to have fallen short so far and productivity growth could probably be kept at 1 to 2 per cent "at best". "To sustain it at 2 to 3 per cent is probably near impossible. We're still seeing whether a lot of the productivity incentives will translate into stronger productivity growth and therefore (economic) growth and whether this will raise wage costs."

Another reason for weakness in manufacturing is that the electronics manufacturing here, in particular, appears to be losing global market share, possibly because it is not plugged into the smartphone value chain, Dr Chua said.

feimok@sph.com.sg

melissat@sph.com.sg

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